The latest UK inflation figures, published at the end of May 2024, saw the official rate of price increase fall to 2.3%, not far from the Bank of England’s target level of 2%. Jeremy Hunt, the chancellor of the exchequer, said the figures were encouraging.
Later that day, the prime minister was apparently so encouraged that he announced the date of the next general election. Rishi Sunak claimed that the British economy was “growing faster than anyone predicted” and that his plan was working.
So how encouraged should UK residents be about the state of the economy? According to the figures, it depends on their income level.
For example, when it comes to inflation, there is good news for the poorest households, with the price of energy (27%) and transport (0.1%) down compared to a year ago. There are also smaller increases in the price of food and drink (from 4% to 2.9%), housing rental costs (3.1% to 2%) and communication, including mobile phones (7.6% to 4.1%).
In terms of earnings, the combination of the April 2024 increase in the “national living wage” and the recent fall in the national insurance rate means that a person working 35 hours a week on the minimum wage is now taking home 9.4% more much more than it was in April last year.
Most price rises are lower than this increase – some significantly – meaning people on lower incomes are better off in real terms than a year ago.
For families with higher incomes, the picture is less positive. People who own their own homes face the biggest price increases (6.6%) for mortgage payments, home insurance and maintenance costs.
There were also larger increases in the cost of eating out or staying in a hotel (6.1% versus 5.9% in March), as well as in the price of health services, including private health care, nursing home fees, the costs of prescription and daily medications. 6.8% v 6.7%). Inflation in recreational and cultural activities remains high at 4.6%.
Persistently high services inflation, which did not fall as much as the Bank of England expected, also reduced the likelihood of an interest rate cut in June 2024. This means that cuts in mortgage rates will come much more slowly, given how closely those two rates are linked in the UK.
In the short term, this pattern of greater optimism for poorer households and less optimism for wealthier households is likely to remain. The increase in labor costs caused by the higher living wage will lead to further increases in the cost of services, which make up a much larger share of consumption by wealthier households.
Longer term, there is perhaps more reason for optimism for wealthier households, with the IMF predicting up to three interest rate cuts this year.
But the UK economy has yet to deal with the effects of attacks on cargo ships in the Red Sea, with some shipping costs up 150% from December 2023. This will feed into inflation over the coming months.
Work pressure
Current job vacancies in the UK are concentrated in retail, hospitality and health and social care work, all of which are heavily dependent on lower income workers. Research suggests that the large number of vacancies should translate into higher wages.
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The opposite is true for higher income households with large declines over the last year in job vacancies in the financial (-14.1%), communications (-25.2%) and science (-19 .6%). Given the reduction in vacancies, wages in these sectors are likely to fall.
In the long run, for both lower and higher income households, sustainable wage growth can only be achieved by improving labor productivity. But productivity growth in the UK remains persistently low across the board.
UK investment also remains sluggish and was 0.6% lower at the start of 2024 than at the start of 2023.
Addressing this productivity and investment stagnation will be key to driving long-term increases in wages and living standards for all.
Optimism for some
One reason for more optimism for higher-income households (and pessimism for lower-income ones) may be the long-term impact of AI. The boom in information and communication technology (the so-called “ICT revolution”) resulted in dramatic increases in productivity in certain sectors, contributing to a fifth of UK GDP growth from 1989 to 1998.
The AI revolution that the UK is embracing is expected to have similar effects, but its benefits are expected to be concentrated in higher-paid jobs at the expense of lower-paid sectors where jobs have more likely to be replaced by AI. and automation – particularly in retail and recreation.
Overall, near-term optimism – and some encouragement – for lower-income households is warranted, with wages rising and inflation falling, and the potential for more wage growth on the horizon. But that could change, as the benefits of automation and AI increasingly accrue to those already better off.