Rising inflation to outstrip wage growth in 2017

The UK wage growth is set to be out-paced by rising inflation meaning 2017 could be difficult for both consumers and businesses.

Consumers are facing a difficult 2017, with higher prices and lower wage growth following the collapse in the value of sterling and rising inflation, according to the latest business trends report by BDO.

Inflation, caused by the increasing cost of goods following sterling’s post-EU referendum slump, now sits at its highest level on BDO’s Inflation Index since mid-2013. The index climbed to 102.8 in October from 102.1 in the previous month, and is now almost three points above the long term trend of inflation at 100.

Increasing inflation is expected to continue in the coming months as the price of goods from overseas markets adjusts to the lower value of sterling. The sharp rise in inflation is set to outpace wage growth and will result in consumers having less to spend in the coming year.

In addition to ailing consumer spending power, the low value of sterling has knocked the confidence of UK businesses. BDO’s Output Index – which indicates how businesses expect to perform in the three months ahead – shrank to 96.6 from 96.9.

BDO’s Optimism Index which indicates how firms expect their order books to develop in the coming six months has also fallen to 98.5 from 99.5. Both optimism and output indices remain in growth territory sitting above 95 but are below the long-term average at 100.

The latest findings suggest that UK economic growth will continue to slow, as the government attempts to agree its strategy to leave the European Union.

Peter Hemington, partner, BDO LLP, believes that the rapidly rising inflation is quickly going to hit the pockets of UK consumers, affect the profit margins of UK businesses and ultimately slow the growth of the UK economy.

Hemington says, ‘The Nissan and Hinkley announcements are a positive start post-Brexit, but the government needs to inject greater confidence back into the UK economy. We need a positive Autumn Statement that highlights immediate investment in infrastructure to help soften the blow to both consumers and businesses, and to encourage growth.’

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