Sunday 23 May 2010

Average UK Earnings – May 2010 Update

As we know inflation according to the retail prices index (RPI) year on year is currently running at 5.3%. This is the highest it has been since July 1991. Looking at historic RPI inflation data shows the average year on year RPI annual change since 1991 at 2.9% 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 (March figures) is running at 7.8% and LNMQ is at 4.8% which is a real increase of earnings year on year of a positive 2.5% and a negative 0.5% respectively. These figures surprised me a lot when I saw them today. We read the doom and gloom regarding rising unemployment, the cuts that are going to be made to the public sector, people on short work and yet salaries are rising a lot and maybe even rising in real (inflation adjusted) terms.

Mervyn King claims inflation is going to come back down because there is spare capacity in the system. If there is spare capacity why are salaries increasing. Surely more people competing for jobs would drive salaries down. I’m beginning to think that there is limited spare capacity. As I said last week in the circles that I move companies are at or over capacity. There is nothing spare. I also know that we are trying to hire some people and are really struggling to get the skills required. That also doesn’t seem to indicate spare capacity in the system.

As always do your own research.

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