The squeeze on real earnings is continuing to ease, increasing the chances that 2014 is the first year that real pay rises since the financial crisis. Granted, the headline (three month average of the annual) growth rate of earnings only edged up to 1.1% in December, below the CPI inflation rate of 2% that month. But inflation fell to 1.9% in January – the first reading below the MPC’s 2% target since November 2009 – and we expect it to ease further over the rest of the year. In addition, the slack in the labour market that is keeping pay growth subdued is declining gradually as employment continues to rise. Accordingly, we think pay could finally begin to rise again in real terms later this year, thereby providing more solid support for a further recovery in consumer spending.
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