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17 April 2024 | EY ITEM Club comments:

Inflation surprised to the upside in March

• Although UK Consumer Price Index (CPI) inflation fell again in March, the scale of the decline underwhelmed as services inflation proved surprisingly sticky. Base effects will continue to push inflation down in the coming months, but it's now uncertain whether inflation returns to the Bank of England's 2% target in April.
• The Monetary Policy Committee (MPC) has suggested it would need to see further progress on services inflation and pay growth before loosening policy. Today's data therefore significantly reduces the chance of a rate cut in May. The EY ITEM Club still thinks the first rate cut will come in June, but April's pay and services inflation data will be key.

Andrew Goodwin, Senior Economic Advisor to the EY ITEM Club, said: “CPI inflation edged down to 3.2% in March, from 3.4% in February. The decline was due to base effects in the food and core categories, after unusually large rises in these components between February and March last year. This downward pressure was only partly offset by higher petrol prices. Nevertheless, March’s figures represented an upside surprise, with sticky services inflation the main factor behind this.

“A more substantial fall in next month's inflation data is highly likely. The 12% cut to Ofgem’s price cap will mean the downside effect from energy prices will grow. Services inflation is also likely to fall back as lower headline inflation should mean April’s annual indexation of inflation-linked contracts and regulated prices results in much smaller price rises than last year. The stickiness of services inflation means it’s uncertain whether inflation returns to the Bank of England's 2% target in April. But even if it doesn't, inflation should fall below 2% in H2 2024.

“The MPC has signalled that further evidence of cooling services inflation and pay growth will be required before the majority are prepared to loosen policy. At 6%, services inflation was above the Bank of England's latest projection of 5.8%, and yesterday's pay data was also surprisingly firm. Therefore, the chances of a May rate cut look very remote. However, the EY ITEM Club still thinks there's a good chance that the first rate cut will come in June, provided that there are no unexpected surprises in the key April data for pay growth and services inflation.”

16 April 2024 | EY ITEM Club comments:

Pay growth remains resilient, reducing chances of a May rate cut

• A surprisingly firm outturn for UK private sector regular pay growth reduces the chances of the Monetary Policy Committee (MPC) cutting interest rates in May.
• But the EY ITEM Club thinks the MPC’s June meeting looks likely to deliver the first cut. The MPC will have two more sets of pay and inflation data by then, including the key April outturns. Survey data points to pay growth continuing to slow, while there is fairly strong evidence that labour market conditions are loosening.

Andrew Goodwin, Senior Economic Advisor to the EY ITEM Club, says: “Today’s labour market release reported that private sector regular pay growth – the Bank of England’s favoured measure – edged down to 6% in the three months to February. However, a strong outturn for February itself indicates greater resilience than earlier data had suggested, with the three-month-on-three-month annualised growth rate rising, albeit from very low levels. 

“Labour Force Survey (LFS) data continues to be published with a large health warning, given that the Office for National Statistics (ONS) is still in the early stages of implementing the methodological changes it hopes will improve the reliability of the data. So, the rise in unemployment in the three months to February must be treated with a healthy dose of scepticism. That said, it does fit with vacancies continuing to drift lower and the HMRC payroll measure of employment falling, so overall there is fairly strong evidence that labour market conditions are loosening.

“Hopes of a May interest rate cut had always appeared to rest on there being a significant downside movement in the February data for pay growth or inflation. Therefore, today's surprisingly strong outturn for pay growth reduces the chances of a May move. 

“The EY ITEM Club expects the first cut to come in June. Two further sets of labour market and inflation data are due to be released before then, including the key April data. Timelier survey data suggests the downward momentum in pay growth has continued, and if this is mirrored in the official data, and labour market conditions continue to loosen, the EY ITEM Club thinks the majority of MPC members will have seen enough to vote for a rate cut in June.” 

05 April 2024 | EY ITEM Club comments:

Construction PMI signals a rise in activity for first time in seven months

• A construction Purchasing Managers’ Index (PMI) of 50.2 in March was in expansionary territory for the first time since August 2023. Alongside the expansion in services and manufacturing activity signalled by their respective PMIs, the latest construction index reinforces the EY ITEM Club’s expectation that the economy returned to growth in Q1 2024. 
• There was also better news on cost pressures facing construction firms. The S&P Global survey’s measure of input prices rose at the slowest pace in three months. With inflationary pressures also retreating in the services sector, the latest survey evidence appears consistent with expectations that inflation will fall significantly in the coming months and that the Bank of England will begin to cut interest rates soon.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “March’s construction PMI showed the sector ending a six-month period of decline last month. An index of 50.2 was up from 49.7 in February and the first reading in expansionary, plus-50 territory since August 2023. Survey respondents cited lower borrowing costs and signs of a recovery in the wider economy as factors boosting construction activity. The fact that new orders rose at the fastest pace since last May bodes well for a further rise in the PMI over the next few months.

“Alongside evidence from the services and manufacturing PMIs of expansion in the economy’s other major sectors in March, the latest construction index adds to signs that the economy returned to growth in Q1 2024, following the mild technical recession in the second half of last year. The impact of public sector strikes will cap how much GDP grew in the first quarter, but the EY ITEM Club thinks a combination of lower inflation, rising real incomes and actual and prospective cuts in taxes and interest rates should see momentum in the economy continue to build this year.

“There was also better news in March’s S&P Global survey on cost pressures facing construction firms. The survey’s measure of input prices rose at the slowest pace in three months. With March’s services survey also indicating an easing in price pressures, the latest evidence is consistent with the expectation that inflation will fall significantly in the coming months and that the Bank of England should begin to cut interest rates soon.”  

05 April 2024 | EY ITEM Club comments:

Construction PMI signals a rise in activity for first time in seven months

• A construction Purchasing Managers’ Index (PMI) of 50.2 in March was in expansionary territory for the first time since August 2023. Alongside the expansion in services and manufacturing activity signalled by their respective PMIs, the latest construction index reinforces the EY ITEM Club’s expectation that the economy returned to growth in Q1 2024. 
• There was also better news on cost pressures facing construction firms. The S&P Global survey’s measure of input prices rose at the slowest pace in three months. With inflationary pressures also retreating in the services sector, the latest survey evidence appears consistent with expectations that inflation will fall significantly in the coming months and that the Bank of England will begin to cut interest rates soon.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “March’s construction PMI showed the sector ending a six-month period of decline last month. An index of 50.2 was up from 49.7 in February and the first reading in expansionary, plus-50 territory since August 2023. Survey respondents cited lower borrowing costs and signs of a recovery in the wider economy as factors boosting construction activity. The fact that new orders rose at the fastest pace since last May bodes well for a further rise in the PMI over the next few months.

“Alongside evidence from the services and manufacturing PMIs of expansion in the economy’s other major sectors in March, the latest construction index adds to signs that the economy returned to growth in Q1 2024, following the mild technical recession in the second half of last year. The impact of public sector strikes will cap how much GDP grew in the first quarter, but the EY ITEM Club thinks a combination of lower inflation, rising real incomes and actual and prospective cuts in taxes and interest rates should see momentum in the economy continue to build this year.

“There was also better news in March’s S&P Global survey on cost pressures facing construction firms. The survey’s measure of input prices rose at the slowest pace in three months. With March’s services survey also indicating an easing in price pressures, the latest evidence is consistent with the expectation that inflation will fall significantly in the coming months and that the Bank of England should begin to cut interest rates soon.”  

05 April 2024 | EY ITEM Club comments:

House price recovery was interrupted in March

• Halifax’s measure of house prices followed its Nationwide peer in showing a month-on-month fall in values in March, the first decline for five months. But with the foundations laid for property values to gradually recover from the modest correction of 2022 and 2023, the EY ITEM Club thinks March’s weakness is probably just a temporary pause for breath.
• Quoted mortgage rates have fallen since the peaks last summer, real wages are rising again and unemployment is low. A recovery in mortgage approvals suggests these factors are boosting activity in the housing market, while very high inward migration offers another prop to demand. 
• Still, quoted mortgage rates remain much higher than in the past and the Bank of England’s reticence about cutting borrowing costs has interrupted what had been a steady decline in rates offered by lenders. But the EY ITEM Club thinks it won’t be long before the Bank of England changes its tone and starts to cut rates, which should boost sentiment in the housing market and bolster the foundations for a return to sustained rises in house prices. 

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Halifax’s measure of house prices fell 1% month-on-month in March, ending five successive months of rising values. This followed a smaller 0.2% fall in Nationwide’s gauge, suggesting that the interruption in what had been a steady recovery in prices is more than just noise in the data.  

“That said, prices on the Nationwide measure were still slightly higher on a year-on-year basis. Meanwhile, the EY ITEM Club thinks March’s weakness in values will prove only a temporary interruption to a gradual rebound in property prices. Falling inflation and still-strong pay growth mean real wages are rising again, unemployment is very low, consumer sentiment has picked up and quoted mortgage rates are significantly down on the peaks of summer 2023. 

“These factors contributed to mortgage approvals in February rising to a 17-month high, while surveys of buyer and seller activity have also picked up. Very high inward migration alongside a continued under-supply of new houses is also underpinning property values. 

“Still, mortgage rates remain much higher than the post-financial crisis norm. And the Bank of England’s caution about signalling the prospect of interest rate cuts has been reflected in markets paring back expectations of how far the policy rate will be cut this year, interrupting a previous decline in mortgage rates. However, the EY ITEM Club thinks a further easing in underlying inflationary pressures means it won’t be long before the Bank of England changes its tone and starts to cut rates, which should boost sentiment in the housing market and reinforce the foundations for a return to sustained growth in house prices.”

04 April 2024 | EY ITEM Club comments:

Services PMI dips, but remains firmly in growth territory

• Although March’s services Purchasing Managers’ Index (PMI) of 53.1 was down from the previous month, it still pointed to a sector in expansion mode. The fact that the composite PMI of 52.8 remained close to February’s nine-month high also suggested that the economy is exiting its long-running period of stagnation. 
• The S&P Global survey pointed to wage rises continuing to push up costs faced by services businesses. However, prices charged inflation rose at the slowest pace since last September as businesses faced increased competitive pressures and sought to boost demand. 
• The EY ITEM Club thinks disinflationary forces mean inflation should fall below the Bank of England’s 2% target this month and is likely to remain sub-target for the rest of 2024, compelling the Monetary Policy Committee (MPC) to start cutting rates in the next few months. 

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “March’s services PMI of 53.1 dipped a little from February’s 53.8 and was the lowest since last November. But it was the fifth successive monthly reading above the 50 ‘no-change’ mark separating the S&P Global survey’s measure of expansion from contraction. With the output balance of March’s manufacturing survey increasing, the composite PMI of 52.8 was only slightly down from February’s nine-month high of 53.0, another indication that the economy is exiting its long-running stagnation. 

“Despite further growth in services output, the latest survey’s measure of price inflation eased to the slowest since last September. Pay rises continued to push up business costs, but competitive pressures and efforts to stimulate customer demand limited the pass-through to selling prices. 

“The EY ITEM Club thinks lower inflation expectations among workers and employers and a looser jobs market should press down on pay growth. And broader disinflationary forces, notably falling energy bills, mean inflation should fall below the Bank of England’s 2% target this month and is likely to remain sub-target for the rest of 2024, which could compel the MPC to start cutting interest rates by the early summer.”

02 April 2024 | EY ITEM Club comments:

Recovery in mortgage demand continues

• A further rise in mortgage approvals and a return to growth in net mortgage lending in February pointed to the recovery in UK housing market activity continuing. The prospect of interest rate cuts by the Bank of England should boost sentiment, although with cuts in the policy rate already priced in by markets, the impact on mortgage rates will probably be modest.  
• Meanwhile, unsecured lending fell back in net terms, although this reflected a rise in repayments rather than lower gross lending. Looking ahead, the EY ITEM Club thinks an improved outlook for discretionary spending will likely prompt consumers to make more use of credit.
  

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “An improvement in the mood music surrounding the housing market, aided by falling mortgage rates, easing cost-of-living pressures and a less unpredictable economic outlook, continued to make its presence felt in the latest mortgage data. Mortgage approvals rose in February for the fifth successive month, with 60,383 approved home loans marking the highest total since September 2022. Meanwhile, the lagged effect of the recovery in approvals since late 2023 finally translated into a rise in net mortgage lending. This stood at £1.5bn in February, the first positive outturn in three months and a 13-month high.

“A brighter economic outlook, helped by the prospect of further falls in inflation and, relatedly, the likelihood that the Bank of England will start cutting interest rates in the next few months, should fuel a further rebound in mortgage demand and housing market activity. But markets are already pricing in several rate cuts this year, as witnessed by a fall in the average rate on new mortgages in February to a seven-month low. A move by the Bank of England will probably therefore offer more support to the housing market via boosting sentiment, rather than by prompting a further significant fall in mortgage rates.

“On the face of it, a fall in net unsecured lending in February was a sign of continued consumer wariness. But the fall in net lending to £1.4bn from £1.8bn in January was more than accounted for by repayments rebounding after January’s decline. Meanwhile, gross lending picked up, and the EY ITEM Club thinks an improved financial outlook, stronger consumer sentiment, and households' relatively low debt levels mean more use of unsecured borrowing should contribute to a recovery in consumer demand this year.”

02 April 2024 | EY ITEM Club comments:

Survey signals manufacturing returned to growth in March

• March’s S&P Global manufacturing survey signalled the first rise in output in 13 months, while the headline Purchasing Managers’ Index (PMI) also rose above the 50 ‘no-change’ mark for the first time since July 2022. Better prospects for the UK and global economies, reflecting lower inflation and the prospect of rate cuts by central banks, means the EY ITEM Club thinks a recovery in manufacturing should become embedded this year. 
• Developments in cost and price pressures were less positive. Disruption to global shipping continued to affect supply chains, contributing to input costs and selling prices rising in March. The recent rise in oil prices also poses a challenge to relatively energy-intensive manufacturing. But the EY ITEM Club thinks the strength of broader disinflationary pressures will still dominate the outlook for price movements in the economy.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Prior to March, the S&P Global survey had signalled a whole year of falling manufacturing output. But the latest survey saw the output balance move into expansionary, above-50 territory for the first time since February 2023. The headline PMI of 50.3 also rose above the 50-mark, in this case for the first time in 20 months. And the EY ITEM Club thinks a return to growth in the sector is likely to build. 

“Both at home and abroad, cost-of-living pressures are easing off the back of falling inflation. Globally, most of the major central banks should begin to cut interest rates over the next few months, easing what had been a squeeze from tighter financial conditions. Meanwhile, the potential boost to investment from increased digitalisation and investment in Artificial Intelligence (AI) technologies, and a move towards green energy generation and other efficiency measures should be positive for manufacturers. 

“However, according to March’s survey, cost and price pressures remain an issue for ‘the makers’. In particular, the price of inputs paid by manufacturers rose at the fastest pace in a year. This partly reflects continued disruption to shipping. Energy-intensive manufacturers are also relatively exposed to the recent rise in oil prices, currently sitting at a five-month high. However, the EY ITEM Club thinks broader disinflationary pressures, particularly from the unwinding of the rise in gas prices of recent years, should continue to dominate, offering a better outlook for manufacturers’ bottom lines.”

02 April 2024 | EY ITEM Club comments:

House prices dipped slightly in March, but this should prove temporary

• According to the Nationwide measure, house prices dipped slightly in March, the first month-on-month fall since last August. But annual growth picked up a little and the EY ITEM Club thinks the stage is set for property values to gradually recover from the modest correction of 2022 and 2023.
• Real wages are rising again, unemployment is low and quoted mortgage rates have fallen since the peaks of last summer. A recovery in mortgage approvals suggests these factors are boosting activity in the housing market, while very high inward migration offers another prop to demand.
• Still, quoted mortgage rates remain much higher than in the past and the Bank of England’s reticence about cutting borrowing costs has interrupted what had been a steady decline in rates offered by lenders. But the EY ITEM Club thinks it won’t be long before the Bank of England changes its tone and starts to cut rates, which should boost sentiment in the housing market and bolster the foundations for a return to sustained growth in house prices.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “What had been a consistent rise in the Nationwide measure of house prices since last summer was interrupted in March. Prices dipped 0.2% month-on-month, the first fall since last August. However, on a year-on-year basis, price growth picked up to 1.6% from 1.2%, marking a 15-month high.  

“The EY ITEM Club thinks the fall in house prices in March will prove only a temporary interruption to a gradual rebound in property values. Falling inflation and still-strong pay growth mean real wages are rising again, while unemployment is very low, consumer sentiment has picked up and quoted mortgage rates are significantly down on the peaks of summer 2023. 

“These factors contributed to mortgage approvals in January rising to a 15-month high, while surveys of buyer and seller activity have also picked up. Very high inward migration amid a continued under-supply of new houses is also underpinning property values. 

“Still, mortgage rates remain much higher than the post-financial crisis norm. And the Bank of England’s caution about signalling the prospect of interest rate cuts has been reflected in markets paring back expectations of how far the policy rate will be cut this year, interrupting a previous decline in mortgage rates. However, the EY ITEM Club thinks a further easing in underlying inflationary pressures means it won’t be long before the Bank of England changes its tone and starts to cut rates, which should boost sentiment in the housing market and bolster the foundations of a return to sustained growth in house prices.”

28 March 2024 | EY ITEM Club comments:

National accounts reaffirm recession last year, but better times are likely ahead

• The Office for National Statistics’ (ONS) previous estimate of a contraction in GDP in Q4 was unrevised in the latest National Accounts, meaning the economy is still thought to have ended last year in recession. But the EY ITEM Club thinks the downturn is probably already over and that economic momentum should build this year. 
• Fast-falling inflation means real household incomes should continue to rise, building on gains in the last quarter of 2023. Lower energy bills will boost consumers’ discretionary spending power, as will the cut in National Insurance Contributions (NICs) which comes into effect in April.
• Still, the cost of living remains elevated compared to a few years ago and prospective interest rate cuts will take time to feed through to stronger activity. But the economy’s long period of stagnation should start to fade.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The ONS’ previous estimate that the economy ended 2023 weakly saw no change in Q4’s national accounts. The fall in GDP during Q4 was left unrevised at -0.3%. And with no revisions to previous quarterly estimates, including Q3’s contraction in output, the latest data reaffirmed that the economy was in recession over the second half of last year.

“The weak starting point for GDP this year means calendar-year growth in 2024 is likely to be limited to less than 1%. However, an acceleration in momentum this year remains on the cards. Fast-falling inflation will support further growth in real incomes, a development evident in Q4 2023 when household income rose 0.7% quarter-on-quarter, up from zero growth in Q3. Double-digit percentage falls in household energy bills in April and, as now seems increasingly likely, July, will also boost disposable spending power further. Meanwhile, next month’s cut in NICs will offer some modest support to post-tax incomes.    

“However, the cost of essentials such as food and energy remains much higher than a few years ago. The structure of the mortgage market and the impact of lower interest rates on the interest windfall received by savers also mean prospective rate cuts this year may prove a slow-burner in stimulating the economy. And households’ elevated appetite to save, with the saving ratio reaching a 10-quarter high of 10.2% in Q4, suggests a degree of caution among consumers. But the EY ITEM Club thinks 2024 will see an end to the stagnation which has characterised the UK economy over the last two years.”

22 March 2024 | EY ITEM Club comments:

February's retail weakness may prove temporary

• A flatlining in retail sales volumes in February brought the previous month's rebound to a halt. But anecdotal evidence suggested unusually wet weather weighed on retail spending in some categories. Sales are on track to grow strongly in Q1, helping to drive a recovery in GDP. And the conditions remain in place for the retail recovery to continue this year.
• A significant fall in inflation, led by decreasing energy prices, will boost household spending power. And the tax cuts announced in the Spring Budget will go some way to offsetting the drag on household incomes from previously announced tax rises.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Following a poor end to last year, retail sales volumes rebounded strongly in January. But February showed the recovery stalling. Sales recorded no growth last month, albeit flatlining marked a slightly better performance than consensus expectations of a 0.3% month-on-month fall. Although a strong increase in clothing sales meant non-food store sales saw a decent rise, this was offset by declines in purchases of food, household goods and fuel. 

“However, the EY ITEM Club wouldn't put too much weight on February's performance as a guide to the outlook for retailers. February was one of the wettest on record. This looks to have supported online spending but, according to anecdotal evidence received by the Office for National Statistics (ONS), reduced footfall in physical stores. And the fact that fuel sales had rebounded to an unusually high level in January meant some payback was likely the following month, a retreat which a rise in pump prices in February will likely have exacerbated. 

“The strength of January's retail performance means sales volumes still look on course to grow strongly in Q1 - another reason to think that the economy's contraction over the second half of last year was short-lived. And the EY ITEM Club thinks the ingredients are in place for a retail recovery to continue through this year. 

“Most importantly, real incomes will be boosted by a substantial fall in inflation, with the Consumer Price Index (CPI) measure likely to fall to below 2% in April and decline further in the second half of this year. The cut in National Insurance Contributions (NICs) announced in the Budget will also offer a modest boost to household spending power, if only partly offsetting fiscal drag from previous tax rises. And while the likelihood of interest rate cuts from the summer probably won't do much to boost spending this year, lower borrowing costs should improve consumer sentiment. On that note, the latest GfK survey showed consumers' confidence in their own financial situation in March hitting the highest levels in over two years.” 

21 March 2024 | EY ITEM Club comments:

MPC takes a more dovish tone

• The Monetary Policy Committee’s (MPC) latest interest rate decision took on a more dovish tone than expected. A majority supported keeping Bank Rate at 5.25%, but two members dropped their previous votes for a rate rise. The committee was also explicit that cutting rates would leave policy still in restrictive territory. And there were hints that it may not take much for some members currently favouring no change in policy to switch to supporting a rate cut.
• The majority on the MPC cited stickiness in private sector pay growth and services inflation, a still tight jobs market and upside risks to the Bank of England’s inflation and pay growth forecasts in favour of keeping monetary policy on hold.
• Still, the EY ITEM Club thinks the case for cutting rates soon remains strong. Lower energy prices mean inflation is likely to fall below the Bank of England’s 2% target in April and remain sub-target for the rest of the year. And timelier indicators of pay growth compared to the standard year-on-year measure have already fallen to a pace consistent with the 2% goal.
• While the MPC’s cautious language and the effect of April's large rise in the national living wage on broader pay growth could mean rate cuts are delayed further, the EY ITEM Club thinks the force of events will push the MPC to start cutting Bank Rate in June.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Since the MPC last met in February, any surprises in the economic data have not been significant enough to prompt a reappraisal of the outlook for inflation or the economy. Indeed, in this latest March meeting, a majority on the committee continued to support keeping the Bank Rate at 5.25%. But the two members who had supported raising rates in February joined the majority in voting for no change in rates this time around.

“The majority on the MPC cited persistently high pay growth, the slow fall in services price inflation and upside risks around the Bank of England’s wage and inflation forecasts as reasons to keep monetary policy relatively tight. The committee as a whole also gave no explicit signal beyond February’s language that it is considering rate cuts, sticking to saying that policy needs to be ‘sufficiently restrictive for sufficiently long’, but that they ‘will keep under review for how long Bank Rate should be maintained at its current level’. 

“That said, the policy statement noted that there were varying views among MPC members on the extent to which risks from stubborn inflationary pressures had faded. This suggests that it may not take much for some of the majority to switch to supporting a rate cut. The statement also acknowledged for the first time that cutting rates would leave policy still in restrictive territory.

“The EY ITEM Club thinks the MPC may find it challenging to maintain a no-change position longer term. As of February, the level of consumer prices had seen little rise over the previous six months, meaning shorter-term measures of inflation are already below 2%. For example, on a three-month-on-three-month annualised basis, which better captures recent trends than the year-on-year measure, inflation in February was only slightly above zero. Lower energy prices point to annual Consumer Price Index (CPI) inflation falling below the Bank of England’s 2% target in April and remaining sub-2% for the rest of this year. While the MPC can cite base effects and core price pressures in arguing that headline inflation doesn’t give the full picture, it is that headline measure which the Bank of England is tasked with targeting. 

“Meanwhile, even those underlying drivers of inflation which have prompted the MPC’s concern are starting to look more benign. The large month-on-month rises in pay in the first half of 2023 will drop out of the annual measure over the next few months, meaning that headline wage growth should come down quickly by the summer. And timelier measures of pay growth have already slowed to a pace broadly consistent with the inflation target. On a three-month-on-three-month annualised basis, growth in private sector pay in January stood at 3.3%. 

“Still, following accusations that policymakers were behind the curve in tightening policy when inflation was heading up, the MPC may well decide it’s appropriate to exercise further caution in bringing rates down. Assessing the effect of April's large rise in the national living wage on broader pay growth offers another reason for inaction for the time being. But the EY ITEM Club thinks the force of events will compel the MPC to shift its position by early summer and start cutting Bank Rate in June.”