David Prosser: The mixed blessings of muted wage growth

Outlook Part of Mervyn King's Mansion House speech last night was a defence of the Bank of England's refusal to raise interest rates despite the continued above-target inflation rate. In a nutshell, the Governor said the UK had been importing inflation, which an interest rate rise would not reduce, while domestic inflation showed few signs of increasing.

Yesterday's employment market data supports that case. It shows underlying earnings growth in April was just 2 per cent – less than half the prevailing rate of inflation as measured by the consumer price index. Plainly, the extended period of higher price rises has not seen workers negotiate higher salary increases – at least not successfully.

As long as that remains so, the Bank of England's Monetary Policy Committee will not feel uncomfortable holding the cost of borrowing at its record low of 0.5 per cent. Still, the fact that earnings growth lags inflation is a mixed blessing: it means the squeeze on household incomes, which is doing so much damage in consumer-facing parts of the economy – most of it, that is – is continuing to tighten.