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Inflation turns positive but report suggests that wages could take years to rise

16 Dec 2015

Following October’s negative figure, the UK's inflation rate as measured by the Consumer Prices Index (CPI) turned positive in November, the Office for National Statistics (ONS) has reported.

The CPI rate is 0.1%, up from a figure of -0.1% for October. Transport costs, alcohol and tobacco prices were the main contributors to the rise, partially offset by a fall in clothing prices, according to the ONS.

Inflation as measured by the Retail Prices Index (RPI) – which includes mortgage interest payments and council tax – was at 1.1% for November, up from 0.7% the previous month.

Monthly CPI inflation has been between -0.1% and 0.1% for the whole of 2015, which has led to the Bank of England’s Monetary Policy Committee holding UK interest rates at 0.5%. The committee again voted to keep the rate unchanged last week.

Chris Williamson, chief economist at data firm Markit, said: ‘UK inflation remained largely absent in November, and looks set to remain weaker for longer than forecasters have recently been expecting. Falling prices for oil and other commodities are helping drive down companies' costs.

‘Weak wage pressures and fierce competition in the retail sector are also helping keep a lid on prices. Hence clothing prices showing a record fall between October and November.’

Meanwhile, a report by the Resolution Foundation has suggested that pay growth in 2016 could be as little as 1%. After six years of stagnation, real pay increased in 2015, but that was primarily due to low inflation.

Laura Gardiner, senior policy analyst at the think tank, argued that pay growth next year would depend on whether the rising productivity could counterbalance rising inflation.

She said: ‘Strong output growth and prolonged low inflation could result in the highest level of real wage growth in over a decade. But equally, a failure to build on the early signs of a productivity recovery, combined with a swifter-than-expected return to target inflation, could send real wage growth tumbling to less than 1%’.

If pay growth did stay at 1% next year, it could mean that average pay levels do not return to pre-financial crash levels until at least 2020.