Inflation is exceeding wage growth, according to Voca

• Annual rate of growth in take home pay eased to 3.6 per cent in April, according to Voca
• Spending power continues to reduce on the back of lower wage growth and rising living costs
• Inflation has now outstripped take home pay growth for the previous seven months

8 May 2007 – The Voca take home pay index  shows that growth in take home pay eased to 3.6 per cent in April from 3.7 per cent in March. This downward trend shows that the expected strong pay increases in the January wage round have so far failed to materialise. To read the full press release click here.

Key findings of the report

• Annual growth in take home pay eased slightly to 3.6 per cent in April from 3.7 per cent in March. The Voca take home pay index suggests that the expected strong pay increases in the January pay round have so far failed to materialise.
• The annual growth in the services sub-index declined to 3.6 per cent in April from 4.3 per cent in March. Growth in the industry sub-index accelerated to 3.4 per cent in April from 2.7 per cent in March.
• Price inflation is exceeding wage growth, with the Retail Price Index growing at an annual rate of 4.8 per cent in March, compared to the Voca take home pay index which grew by 3.7 per cent. Inflation has now outstripped take home pay growth for the previous seven months (see Figure 6). As a result the buying power of incomes is being eroded, with high street spending growth maintained by record levels of consumer debt.
• With inflation rising above the Bank of England’s tolerance zone to 3.1 per cent in March, an increase in the base rate at the next Monetary Policy Committee meeting is almost certain. The effect of this will be a further strain on household finances as mortgage interest payments rise.

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 Earning 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 first estimates of Gross Domestic Product released by the Office for National Statistics show the UK economy expanded by 0.7 per cent in the first quarter of 2007. This takes the annual rate of economic growth to 2.8 per cent, down from 3.0 per cent in the final quarter of 2006. Output in the service sector rose by 0.8 per cent in the quarter, whilst the latest figures point to difficulties in the manufacturing sector, with output falling by 0.2 per cent in February.
• The latest Average Earnings Index figures from the Office for National Statistics show annual growth, excluding bonuses in February, remaining at the January level of 3.7 per cent. However, there was an increase in the level of bonus payments, with earnings growth including bonuses rising to 4.9 per cent in February from the upwardly revised January figure of 4.5 per cent. This mirrors the trend identified by the Voca take home pay index, the growth of which accelerated to 4.2 per cent in February from 3.3 per cent in January. The claimant count for unemployment benefits in March fell to 910,800 from 920,000 in February; this is the sixth consecutive monthly fall and the reduction of slack in the labour market should exert upward pressure on wages.
• The Voca manufacturing sub-index shows growth in take home pay increasing to 3.4 per cent in April from 2.7 per cent in March. Growth in the Average Earnings Index for manufacturing fell to 3.4 per cent in February from 4.0 per cent in January. Pay growth in the manufacturing sector continues to lag behind the service sector. Production data which shows declining manufacturing output provides further evidence of the long-term difficulties being faced by the sector. The problems are currently being exacerbated by the strength of sterling, which makes UK exports more expensive and foreign imports cheaper; and the slow-down in the USA is further dampening demand.
• The Voca services sub-index fell to 3.6 per cent in April from 4.3 per cent in March. The latest service sector earnings data, which lags two months behind the Voca data, rose to 5.0 per cent in February from 4.5 per cent in January. This trend reflects that of the Voca services sub-index over the first two months of 2007, with the acceleration driven by higher bonus payments.
• Annual growth in consumer prices rose to 3.1 per cent in March from 2.8 per cent in February. Retail price inflation, which is more commonly used in wage negotiations, as it includes the cost of housing, rose to 4.8 per cent in March from 4.6 per cent in February. This is its highest level since 1991. The implication is that growth in workers’ cost of living is exceeding the growth in their wages, which drives living standards down.
• Data released by the Office for National Statistics showed the volume of retail sales expanded by 0.3 per cent in March from the February level. This takes the annual growth figure to 4.8 per cent, down from 5.1 per cent in February. However as highlighted in the Voca take home pay index, the annual rate of growth in wages is easing and retail spending is increasingly reliant on consumer debt.  The latest Bank of England figures show consumer debt has expanded by £10.8 billion in March.
• The housing market picked up again in April. Figures collected by Nationwide showed the annual rate of house price growth rose to 10.2 per cent in April from 9.3 per cent in March.
• The Bank of England is almost certain to raise interest rates on the 10 May, with inflation rising above the tolerance zone to 3.1 per cent in March. There has been speculation that a 0.5 per cent increase may be on the cards. However, we expect the move will only be 0.25 per cent, as oil prices and utility bills will help to bring down the annual inflation rate. The impact of the interest rate rise will be a further squeeze on household finances as mortgage interest repayments rise.