Wages outstrip inflation

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 23rd June 2015 16:39 EDT

In the UK Inflation rose by 0.1 per cent in the year to May according the Office for National Statistics, up from -0.1 per cent a month earlier and ending a brief spell of deflation. With the largest upward contribution coming from transport services, notably air fares the ONS said. Inflation had slipped into negative territory for the first time since the 1960s in April. But economists predicted this would be temporary - saying the price of air and sea fares were significantly lower than this time last year due to the unusual timing of Easter. So far, low inflation has been a boost for workers, whose real take home pay has increased.

The Bank of England has previously said it expects inflation to hover around zero before rising "notably" towards the end of this year, as the impact of low oil and food prices fade away. However, economists said today inflation is still well below the Bank of England's target of two per cent - meaning it remains unlikely to hike interest rates anytime soon.

The Pound gained after average earnings increased and surpassed even the most optimistic of forecasts. This is good news for the British economy as wages now outstrip inflation. Inflation is the measure of price increases in the UK, so when wages are rising faster than inflation, this means there is more disposable income in the British economy.

UK retail sales growth slowed sharply last month after strong growth in April, as shoppers bought fewer clothes, retail sales volumes rose 0.2 percent in May broadly in line with economists' expectations to show 4.6 percent growth on the year. Sales in the three months to May were up 4.5 percent compared with a year earlier, the slowest year-on-year growth in six months. Many economists have said that when adjusted for lower prices, British consumer spending could be on track for its strongest year in a decade, as low inflation and rising wages give households more disposable income.

In Europe all eyes were again on Greek Prime Minister Alexis Tsipras who said he’s ready to assume responsibility for the consequences of rejecting an unfair deal with creditors. He warned that he would “say the big no” to any agreement that continued “catastrophic policies” dictated by the country’s bailout. Finance ministers of the Czech Republic and Slovakia, who will be involved in another attempt to resolve the crisis in a meeting of euro-area finance ministers in Luxembourg, said a Greek default was now a realistic scenario.

Attention will start to be shifted to a summit of EU leaders scheduled for June 25-26 in Brussels, just days before Greece’s bailout program expires at the end of the month. Recent sources have also suggested that German Finance Minister Schaeuble is to tell law makers to make plans in preparation for no agreement with Greece.

International Monetary Fund (IMF) boss Christine Lagarde warned there is "no period of grace" for Greece over a debt repayment deadline. Lagarde said Greece would be in default on its loans from the IMF if it failed to make a €1.6bn payment on 30 June. German Chancellor Angela Merkel said earlier she was "still convinced" that a Greek debt deal was possible, despite European Commission, the IMF and the European Central Bank (ECB) being unwilling to unlock bailout funds until Greece agrees to reforms. They want Greece to implement a series of economic changes in areas such as pensions, VAT and on the budget surplus before releasing €7.2bn of funds.

The U.S. home-building industry enjoyed its best two months in more than seven years as it headed into its busiest season, even as it began work on fewer houses last month following an April surge. While housing starts declined 11.1 percent to a 1.04 million annualized rate, it followed April’s revised 1.17 million pace to cap the best back-to-back readings since the last two months of 2007, the Commerce Department reported in Washington. Permits for future projects climbed to the highest level in almost eight years, indicating activity will probably pick up.

The Dollar lost ground after a statement from the Federal Open Market Committee (FOMC) signalled a pickup in the economy is keeping it on track to raise interest rates this year, though subsequent increases are likely to be more gradual than anticipated. "Since the committee last met in April, the pace of job gains has picked up and labour-market gains have improved further", Fed chair Janet Yellen said. She then went on to say that young couples are delaying getting married because they are finding it so hard to get a mortgage to buy their first home.

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