An income squeeze is coming and Brexit is to blame

Inflation is starting to rise but wages are unlikely to keep up as the economy weakens 

James Moore
Tuesday 18 October 2016 17:03 BST
Will the consumer feel up to shopping sprees like this in the face of rising inflation and stagnant wages?
Will the consumer feel up to shopping sprees like this in the face of rising inflation and stagnant wages? (PA)

“Pound drops and I am not affected,” huffed a Brexiter who emerged to snarl on my Twitter feed.

When I see things like that I sometimes have a look at their feeds. You frequently see some quite nasty stuff, up to and including racism and islamophobia. This one was no different.

The individual in question also declared themselves to be a pensioner. So of course they were right. The falling pound won’t, in theory, affect them. Under the triple lock the state pension rises in line with inflation, average earnings, or 2.5 per cent, whichever is higher. They can thank former Prime Minister David Cameron for that.

Unfortunately the falling pound will affect the working population that pays for those pensions. The latest inflation figure shot up to 1 per cent in September from 0.6 per cent in August. The Office for National Statistics said the rise was “not explicitly linked” to the 17 per cent fall in the pound since the referendum. Other factors played a role, notably the fact that fuel and clothing were very cheap this time last year.

However, the effect of the lower pound is feeding through the system and will affect future figures. “The recent return to positive producer price inflation can be partly attributed to the changes in the sterling exchange rate,” said the ONS, confirming that thesis in a wordy way.

Sooner or later, and probably sooner, we will feel the effects of that. Will wages rise to keep up in the same way as the state pension? That is rather doubtful in a weakening economy.

Already the Resolution Foundation and the TUC are voicing fears that we’re about to enter another wage squeeze. The one we’ve just come out of was one of the longest since the Victorian era.

Several years of very low inflation helped to limit the fall in living standards that followed the financial crisis. This latest self inflicted political and economic crisis will, however, see inflation rising at the same time as the labour market starts to soften. The outlook is anything but rosy.

The Government could, and should, at least hold up wages at the bottom through increasing what former Chancellor George Osborne described as his national living wage. The trouble is, as a fortuitously released report from the Resolution Foundation noted on the same day as the inflation figure, that doesn’t apply to the self employed.

The Foundation’s Earnings Outlook found the self employed workforce grew by a remarkable 45 per cent between 2001-02 and now. However, its members' earnings fell by around £60 a week over the same period.

No wonder. Modern self employed workers typically lack anything resembling pricing power. Uber drivers, delivery people working for companies like Hermes, many hair dressers, all typically find themselves in hock to and at the mercy of one “client” that is responsible for all their business and dictates the terms of that business, take it or leave it.

The Government is reviewing the situation and it needs to. In the meantime, while my selfish Twitter correspondent trumpets to the world how they’re alright in the face of the falling pound, much of the rest of the country is just going to have to batten down the hatches and prepare tor another tough few years.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies


Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in