Families feel the pinch as oil price pushes inflation above wage rise

BRITISH families’ finances are back under the cosh as rising petrol prices push inflation above wage growth, economic data will show this week.

Pay is thought to have risen 2.5pc in the year to May, while inflation is expected to be up to 2.6pc in June – reversing the recent pattern of wages rising faster than prices.

This will contribute to slower economic growth this year, the EY Item Club warned.

Its analysts now expect GDP growth of 1.4pc this year, down from its March forecast of 1.6pc.

That would make 2018 the worst year for economic growth since 2012.

“Strong retail growth in April and May and some signs of green shoots in the new car market point to the consumer sector staging a decent recovery from weather-related weakness earlier in the year,” said chief economic adviser Howard Archer.

“But the more ‘physical’ parts of the economy, manufacturing and construction, have shown less momentum, with the former possibly held back by an unexpected slowdown in the eurozone economy. The hoped-for boost to consumers’ purchasing power from falling inflation is now also looking more fragile because of the rising price of oil and hikes in energy bills.”

Policymakers at the Bank of England will vote on interest rates on Aug 2, and this week’s data is the last to be published on wages and prices before then.

Markets are confident they will raise rates from 0.5pc to 0.75pc, putting a 76pc probability on this happening.

Mark Burgess at Columbia Threadneedle said raising rates could be a mistake when the economy is not growing particularly strongly.

“There appears to be an increasing view from the Bank that we need to return to a tightening cycle, albeit a modest one,” he said.

“Given the uncertainties surrounding Brexit, given the weakness in the economy, we would view a UK interest rate rise as unnecessary.

“It will add a further headwind to growth in the UK.”

Economist Dean Tucker at UBS suspects markets are too confident rates will rise.

“There is definitely a sense the economy is slowing, I think given the current political backdrop business sentiment is unlikely to see a sharp improvement,” he said.

“That points to the economy continuing to trundle along at its current rate.

“There is a lot of expectation [of a rate hike] but we’ve got to bear in mind the Bank is conscious of the growth outlook.

“Certainly what we’re seeing on international developments as well could give them another reason to hold off.

“The cost of waiting another quarter [before raising rates] is zero in their minds.”

In June three members of the Bank’s nine-strong Monetary Policy Committee voted to raise rates, including chief economist Andy Haldane, raising expectations of a vote to go from 0.5pc to 0.75pc in August.

However, last week deputy governor Sir Jon Cunliffe indicated he did not see enough underlying inflation building up to justify higher rates just yet.