Economic Monitor: Real incomes begin to rise
Inflation continues to ease, with the CPI rate falling to 6.8%. Following strengthening nominal wage growth, real incomes have started to increase, albeit barely. Assuming inflation continues to ease below 5% into 2024, elevated wage growth is likely to offer some support for household incomes.
Retail performance over the past few months has been mainly led by weather-related trends, and despite a positive end to Q2, sales dropped considerably during the sixth wettest July since 1836. Input costs remain high, particularly with elevated wage growth rates, and this is implying stickier services inflation, despite goods slowing considerably more.
The impact of higher interest rates is weighing on the economy and will continue to do so over the rest of this year and into the next. Our anticipation is that rates are held at an elevated level at least until the Bank of England is convinced inflation has returned to the 2% target rate. This suggests servicing and borrowing costs for both businesses and consumers will remain expensive and stress on businesses (particularly those over-leveraged) will linger. Our central expectation remains that economic growth will broadly be flat over the next year but that the risk of inflation persisting has risen, particularly as oil prices begin to pick up again.
Harvir Dhillon, Economist at the British Retail Consortium