Can wage growth keep up with rising inflation?

Last week’s labour market and inflation figures have fueled concerns that the impact of rising inflation on real earnings will cause a significant slowdown in consumer spending growth. Indeed, rising inflation and a fall in annual average earnings growth meant that annual real wage growth in the three months to December 2016 (of 1.4%) was the weakest for two years. However, we believe that nominal earnings growth will start to rise as the relationship between labour market slack and wages, which has broken down recently, re-asserts itself. This should occur due to the fading of factors that have held wage growth down – including low headline inflation, employment composition effects and subdued productivity growth. Accordingly, while real wage growth should slow, we don’t think that real incomes will suffer from outright falls.