Take home pay rises further in June,according to Voca

• Voca index mirrors retail sales figures
• Fatter pay packets may lead to inflationary pressure

5 July 2006 - The Voca take home pay index  shows growth in take home pay rising to 5.2 per cent in June from 4.0 per cent in May. The index, which is based on a three month moving average, has risen for the second consecutive month after four consecutive months of decline. To read the full press release, please click here.

Key findings of the report

• In June the Voca take home pay index rose by 5.2 per cent after rising by 4.0 per cent in May. The index is based on the annual change of a three-month moving average.  See Figure 1.
• The Voca industry index saw a rise in the year-on-year change for the three months to June to 4.9 per cent from 3.1 per cent in May, whilst the Voca services index rose to 5.5 per cent from 4.7 per cent in May. See Figure 2.
• The overall rise was a result of increases in both the Voca industry index and Voca services index and is the second consecutive rise. The industry index is roughly in line with its trend level now but growth in disposable income is still growing faster in the service sector and continues to drive growth in the Voca take home pay index.
• According to the latest public finances data there was a fall in the annual growth rate of the amount employees paid in income tax and national insurance contributions from 6.0 per cent in the three months to April to 4.7 per cent in the three months to May and this will have helped boost take home pay. 
• Given the correlation between the Voca take home pay index and the comparable retail sales data (see figure 5), the latest rise in the Voca take home pay index indicates that the improving trend in retail sales will continue on its upward path.

The Voca take home pay index series
Three month average annual change (per cent change)

Results
Figure 1: Voca take home pay index against private sector Average Earnings Index

Figure 2: Voca industry and services index

Figure 3: Voca industry index against private sector AEI (manufacturing sector)

Figure 4: Voca services index against private sector AEI (service sector)

Figure 5: Voca take home pay index against retail sales index (all retailing)

Economic commentary from cebr

• The latest economic data highlights the upswing in the UK economy with strengthening growth in gross domestic product, earnings and retail sales. However, inflationary pressures remain on the horizon and these could be exacerbated by the strengthening demand in the economy. This is reflected in upward trend in the Voca take home pay index and would support those in favour of a rate rise later this year.
• Average growth in gross domestic product in 2006 as a whole is set to be substantially better than last year, at 2.6 per cent compared to 1.9 per cent. This is evident in the Voca take home pay index which shows disposable income growth strengthening across the economy in recent months. However, we believe the economy is unlikely to see any further acceleration and therefore we expect to see more steady growth in disposable income.
• The latest official earnings data continues to support the Voca take home pay index. The figures show that average earnings including bonuses rose by 4.4 per cent in the year to April, up from 4.2 per cent in March. On the government's average earnings excluding bonuses measure, wages rose by 3.8 per cent in the year to April slightly down from 3.9 per cent in March. Claimant unemployment rose by 3,000 in May, but employment also increased – by 74,700 in the three months to April.
• The seasonally adjusted volume of retail sales rose for the fourth consecutive month – increasing by 0.5 per cent between April and May. This takes the year-on-year growth rate up to 4.0 per cent. Positive sales growth is a clear sign of a retail recovery and this has been supported by the growth in disposable incomes – as evident in the Voca take home pay index which has risen for two consecutive months and currently stands at 5.2 per cent. The correlation between the Voca take home pay index and the comparable retail sales data is illustrated in figure five.
• In June the Office for National Statistics reported that output in the manufacturing sector unexpectedly slipped back by 0.2 per cent in April, following a 0.7 per cent rise in the previous month. However, the sector continues steadily on an upward trend, with year-on-year growth at 0.5 per cent. We expect a favourable inventory cycle and the European economic recovery to help support growth this year. In turn we expect to see a more steady growth in disposable income, which has been fairly volatile in recent months following redundancies.
• Inflationary pressures are still a concern. Producer price inflation rose from 2.5 per cent in April to 3 per cent in May whilst consumer price inflation rose to 2.2 per cent in the year to May from 2.0 per cent in April.  This 0.2 percentage point rise in the growth rate of consumer prices follows a similar rise in April and pushes inflation above the 2.0 per cent target once again. The May Bank of England Inflation Report predicted high and volatile inflation until autumn but expects it to fall back to around the target by next spring. Therefore the latest inflation figures will be in-line with the Monetary Policy Committee’s expectations and should not leave any room for a change in rate expectations.
• In June the Bank of England’s Monetary Policy Committee decided to keep interest rates frozen at 4.5 per cent for the tenth month in a row. A rate rise in August or September remains possible but much will depend on the state of the financial markets and the US economy this summer. The latest data from the Voca take home pay index supports the view that there will be a rate rise later this year, particularly if growth in disposable income continues to strengthen.