Squeeze on real incomes won’t be too severe

After two-and-a-half years of rising real wages, this week’s inflation and labour market figures confirmed that the pay squeeze has returned. And, with inflation rising faster than expected, some further drop in real earnings looks likely over the coming months. However, the squeeze shouldn’t be as sharp or prolonged as that seen after the financial crisis, and there are other reasons to think that spending growth might hold up rather better this time around. For a start, the labour market still appears to be tightening and we remain optimistic that this should result in at least some pick-up in nominal wage growth this year. And we think inflation should peak towards the end of this year, while nominal wage growth continues to accelerate slowly, paving the way for a faster increase in real earnings next year. And with employment still growing strongly, confidence remaining upbeat and credit conditions relatively supportive, we continue to think that spending growth will continue to slow, not collapse.