Brexit wage squeeze begins as oil, pound stoke inflation

BRITISH consumers are starting to feel Brexit’s bite.

Real wages were rising at the weakest pace since early last year, data published yesterday showed, as oil prices and the weaker pound stoked inflation. The pressure looked set to intensify with employment growth slowing and economists predicting price gains as fast as 3 percent next year.

“There are signs of cracks appearing in the UK labour market after resilience in the run-up to, and immediate aftermath, of June’s Brexit vote,” said Howard Archer, the chief UK and European economist at IHS Global Insight. “Muted earnings growth threatens to weigh down on consumers’ purchasing power along with markedly rising inflation.”

Signs of the crunch come a day after data showed inflation hit 1 percent in September, the fastest in almost two years.

While wages are still rising faster, they may not be able to keep up for long. That will undermine consumer spending, the UK’s economic growth engine. Gap’s Banana Republic chain plans to close its UK stores next year as sales slip.

The most recent inflation and unemployment data also predate sterling’s 5 percent drop this month. Barclays this week revised its 2017 consumer price growth forecast to 2.3 percent from 1.9 percent. The pound whipsawed between gains and losses yesterday, leaving it little changed at $1.2308 (R17.2556) as of 11.55am London time.

The number of people in work rose by 106 000 in the quarter to August, down from increases above 170 000 in recent months, the Office for National Statistics said.

While the gain was enough to keep the jobless rate at an 11-year low of 4.9 percent, nominal incomes were rising just above 2 percent a year. Adjusted for inflation, basic pay gains slowed to 1.7 percent.

The outlook for faster inflation and slower wage growth underscored the dilemma facing Bank of England policymakers as they considered whether to add to stimulus measures put in place following the Brexit vote.

Officials indicated they might loosen policy again and more than 70 percent of economists in a Bloomberg survey expected a rate cut on November 3.

While the economy held up better than expected since the June referendum, a sharp slowdown was predicted next year with firms reporting cuts to hiring and investment plans. Figures for August alone showed the unemployment rate rising to 5 percent from 4.7 percent.

The number of people out of work rose for the first time since February. Jobless claims increased for a second month. Basic pay growth accelerated to 2.3 percent from 2.2 percent.

“The labour market will probably maintain reasonable momentum into year-end,” said David Tinsley, the chief European economist at Exane BNP Paribas. “But next year… unemployment should rise. At the same time, with inflation picking sharply, real wage rises will likely slow very sharply.” – Bloomberg