Bulletin: Inflation, economic growth and real pay

Lower food inflation

Food price inflation continued to decline from 8% to 6.9% in January, which was exactly in line with IGD’s expectations. Inflation in food service behaved differently, rising from 7.3% in December to 7.7% in January. One reason for this may be increasing labour costs – if so, further cost increase may take effect in April when the new National Living Wage is introduced.

See our new food inflation forecasts in our latest Viewpoint Report: As food inflation falls, what’s in store for 2024?

IGD Viewpoint: There are a number of risks for food inflation in the short-medium term. These include border issues, energy prices, geo-political stresses and labour costs and weather. On balance, IGD anticipates that food and drink inflation will slow and eventually level off at some point before year-end. The overall cost of a typical food shop is not expected to fall in the near- to mid-term.

Stable inflation

New ONS data shows that “all items” inflation was stable in the latest month. Using the CPI method, year-on-year inflation was 4.0% in January 2024, unchanged from December 2023.

The strongest upward pressure came from transport and housing and household costs, especially higher costs for utilities, following the adjustment of the energy price cap in January. This was offset by weakening contributions from clothing, food and drink and furniture and household goods.

See our full analysis here.

UK enters recession

The ONS has reported that the UK economy has entered a recession. This is defined as two consecutive quarters of “real terms” contraction. GDP declined by 0.3% in the three months to December 2023 (Q4), following a decrease of 0.1% in Q3 2023. GDP declined by 0.1% in December 2023. The services sector is estimated to have fallen by 0.2% in the three months to December 2023. The largest negative contributors to services output included declines in wholesale and retail trade.

IGD Viewpoint: The headline GDP data is worrying, but it is potentially misleading, since it does not consider population growth. GDP-per-capita has fallen much more sharply than the headline data suggests. GDP per capita fell consistently over 2023, with the rate of decline accelerating over the year, reaching -0.4% in Q3 and -0.6% in Q4.

To some degree, falling demand may be a consequence of tight monetary policy, which is intended to reduce demand and thus control inflation. However, there is not much sign that high interest rates are encouraging higher saving or debt repayment. The new data shows that the UK is facing into serious economic challenges including skills shortages and weak infrastructure.

These are well understood, however, have so far proven difficult to address. These will be key priorities of the next government.

Pay growth slowing

Average pay is continuing to grow ahead of inflation, however, growth is continuing to slow. Average pay growth in the UK peaked in summer 2023 at about 8.6% year-on-year. It has slowed since then to 6.7%.

The rate of inflation is also slowing, but at a faster rate. Therefore, real pay is still in growth.

IGD Viewpoint: Data from the Bank of England decision-maker panel suggests that future pay expectations remain unchanged for now. Pay is expected to grow about 5.0% in the next year.

However, with inflation falling, it is becoming harder to justify cost-of-living pay rises. It will also become harder to pass on the cost of higher wages down the supply chain. It is therefore likely that pay growth will slow in the year ahead. This will make it harder for workers to rebuild their spending power.