Average UK Earnings – April 2010 Update

As we know inflation according to the retail prices index (RPI) year on year is currently running at 4.4%. Looking at historic RPI inflation data shows the average year on year RPI annual change since 1991 at 2.8% and the trendline since 1991 shows inflation year on year trending downwards. My chart today shows these RPI figures in blue.

I also show the non seasonally adjusted average earnings index (LNMM) in red and the seasonally adjusted average earnings index (LNMQ) in olive. Both of these are also trending downwards but importantly at a rate higher than inflation meaning the gap is closing. Historically the average of LNMM since 1991 has been 4.1% and LNMQ has also been 4.1%. This means the average real increase of UK earnings has been 4.1%-2.8%=1.3%.

Today LNMM year on year (February figures) is running at 5% and LNMQ is at 5.4% which is a real increase of earnings year on year of a positive 0.6% and 1.0% respectively. This means that average earnings in real inflation adjusted terms are increasing at less than they have historically (as eyeballing the trend lines clearly shows) but what surprised me is that they are actually back to increasing in real terms. Firstly I’ve been thinking about why over the long term earnings should increase above inflation and came up with the following list:
1. Inflation is being under reported
2. Average earnings are being over reported
3. We are becoming more efficient in the work place meaning we can be paid more in real terms while still retaining our competiveness with the world
4. We are simply being paid more which means we are losing our competiveness on the world stage

I sure hope it’s due to point 3 but I don’t necessarily believe that’s the case given what I see in the UK today.

I was also very surprised at why, given the current state of the UK, salaries should be back to rising at above inflation rates. This certainly hasn’t been the case since 2009 when on a number of occasions salary increases year on year were well below inflation. Initial thoughts were:
- Companies that put people onto short work are back to working full weeks
- Banks are back to paying big bonuses (even if it is with tax payers bail out money) and these are skewing the data
- Wage inflation is feeding back into the system

I work in private industry and I know that some companies that were on short work weeks are gradually getting back to full weeks. I also know that in my industry it certainly isn’t wage inflation but I’m not sure about other industries. Is wage inflation starting to feed back into the system? If it is then the Bank of England may be playing a dangerous game with their easy money policy.

What do you think?

As always DYOR.