The declining unemployment figures were such good news today, that most commentators appear to have overlooked reporting the data that ONS also published on wages. These show average wages in February were up 2.2%, a figure significantly ahead of the latest published inflation figures (RPI=0.9%, CPI=0%). It is therefore very tempting to think wages are now increasing much higher than inflation and that the slack in the economy may have been extinguished. As ever with statistics there is much more to this than first appears. Although wages have picked up in the last year, workers have probably not yet negotiated better deals than inflation.
The complexity comes about because the wage bargaining process takes time and therefore has used a historical inflation benchmark as its reference point. The process of deciding on wage increases through to their implementation can take companies three months (or in the case of the public sector, more than double this time). For example it is likely that many of the wage increases included in the latest data today were actually decided looking at inflation figures from last autumn. It is therefore important to look at a lagged indicator of inflation in comparison to the ONS wage data.
The chart below therefore compares the rises in wages published by ONS with a lagged inflation figure. To make the data comparable, I have lagged inflation by six months, i.e. the latest wages figures (February 15) are being compared with what inflation was like in August 14. You can argue over the precise lagging, but this seems to fit the data quite well.
For inflation I have taken RPI as this most accurately reflects price rises experienced by people (see here for problems with CPI). RPI is also the main benchmark used in the private sector still.
What is interesting about the graph is it shows that in “normal times” – say in the 4 years prior to the 2007 recession, wages exceeded RPI inflation by about 1% . This is in stark contrast to the first four years of the collation (2010-2014) where they lagged RPI by an average of 2.4%.
All this started to change about a year ago. Since then, wages have started to catch up the lagged inflation measure. It remains to be seen if they manage to exceed it longer term. There are two scenarios here. The first assumes the slack in the economy has been used up and we return to normal 1% premium i.e. point A by the end of year, i.e. wages about 2% up in December 2015.
The second is that the latest data is somehow more of a pre-election effect brought about by a short-term borrowing and housing stimulus. In which case wage rises may decline back to near-zero levels by the end of the year as the impact of recent headlines of zero inflation rates take their toll on wage bargaining. i.e point B.
However what is key to note though is that the simple graph published by ONS is implying that wages are exceeding inflation by nearly 2% is misleading. That is just wrong because of the lagging effects and also their usage of CPI which is always about 1% lower than RPI.