• In September the Voca take home pay index rose by 4.2 per cent after increasing by 4.7 per cent in August. The index is based on the annual change of a three-month moving average.  See Figure 1.
• The Voca industry index, on a year-on-year basis for the three months to September, fell to 5.2 per cent from 5.6 per cent in August. Growth in the Voca services index also eased further — rising by 3.5 per cent in September following a rise of 4.0 per cent in August. This is the lowest level of growth in take home pay in the sector since February 2005. See Figure 2.
• Given the correlation between the Voca take home pay index and the comparable retail sales data (see figure 5), the latest movement in the Voca take home pay index suggests that retail sales may be less buoyant in the coming months.
• The latest Voca take home pay index shows growth in disposable income easing for the second consecutive month indicating that the labour market is slackening. This will comfort the Bank of England. However, if consumer prices continue to remain above target, a rate rise in November is still likely.

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


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

Figure 2: Voca industry and services indices

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 recovery in United Kingdom output growth, since weakening in 2005, is now well underway. Gross domestic product was estimated to have grown by a revised 0.7 per cent in the second quarter of 2006, reflecting strong consumption and business investment growth. Strong consumption has been supported by steady growth in take home pay — as reflected in the Voca take home pay index. Output has grown slightly faster than its historical average but the Bank of England’s central projection anticipates a slight slowing over the forecast period — the extent of which will partly depend on the impact of the US slowdown.
• The latest labour market statistics are inline with the performance of the Voca take home pay index two months ago. Data from the Office for National Statistics shows that from May to July the number of people in employment increased by 38,000 but that the employment rate declined by 0.1 per cent over the quarter to 74.6 per cent. An inflationary signal from the data is highlighted in the increase in average earnings (including bonuses) which grew by 4.4 per cent between May and July, up by 0.1 per cent on the previous month. However, more recent data from the Voca take home pay index highlights that wage inflation has since begun to ease.
• Monthly retail sales in the UK rebounded by 0.3 per cent in August, recovering from the revised pause in growth in July. On a year-on-year basis, sales were up by 4.3 per cent in August. Sales of household goods were particularly buoyant, no doubt helped by a strong housing market and growth in earnings evident in the Voca take home pay index, despite growth in take home pay slowing slightly. The correlation between the Voca take home pay index and the comparable retail sales data is illustrated in figure five. Given the declining growth in take home pay we should expect to see retail sales growth ease in the coming months.
• The cost of raw materials in the manufacturing sector has come down slightly although manufacturers continue to face pressures from high input prices. Producer input prices dropped by 1.2 per cent in August from July. The fall in prices was driven by the recent decline in oil prices. Year-on-year however, the input price index stands 7.6 per cent higher than in August 2005. Output prices remained unchanged in August from July, though year-on-year prices rose 2.6 per cent from August 2005, following a 2.9 per cent rise in the year to July. The lower price pressures among manufacturers has helped to push down growth in earnings in the sector — as indicated by the Voca take home pay index for the industry sector.
• In August, consumer prices rose by 0.4 per cent taking the year-on-year inflation rate to 2.5 per cent. This compares to a rate of 2.4 per cent in the previous month. The increase came despite a fall in petrol prices in the year. Based on the Bank of England’s central projection for inflation — the consumer price index is expected to rise further in the near term before easing back down. However, this is the fourth consecutive month that it has remained above target and, as a result, there are growing pressures for the Bank to raise interest rates in November — despite news of lower producer prices and growth in earnings.
• The latest data from the Voca take home pay index which highlights disposable income inflation slowing should comfort the Bank and suggests that rates are likely to be kept on hold again this month. However, the strength of economic growth in the UK economy will serve to support the Bank of England if it raises rates again this year. In addition, if consumer prices remain above their 2.0 per cent target, it is probable that the Bank will increase the base interest rate by a quarter-point in November.