The Institute of Directors has said that the next few months will be a test of whether wage growth and productivity gains will remain a feature of the British economy in 2016, as official figures showed inflation ticked up to 0.1 per cent in November 2015.
Michael Martins, Economic Analyst at the IoD, said: “Inflation may still be hovering around zero, but with the sharp drop in oil prices set to fall out of the index, this should be one of the last months where prices flat-line. The temporary period of low inflation has been a boon to the UK economy, shoring up our recovery, stimulating demand and boosting wages in real terms. The threat of Britain slipping into serious deflation was always small. The public still expects prices to go up over the next few years – an important indicator of consumer confidence and a sign that there is little prospect of deflation becoming entrenched.
“As inflation begins to climb, it will be a test of the British economy to see if we can cling on to the strong wage growth and productivity gains of recent months, or whether they will dissipate as prices begin to rise. Despite real wages growing strongly in 2015, nominal increases were still small. Employees may begin to demand higher wage increases in cash terms once prices begin to go up and they feel the pinch on their disposable incomes. When this occurs, employers and staff will be under even more pressure to raise productivity to pay for sustainable wage rises.
“With the US Federal Reserve likely to raise rates this week, this will alleviate some deflationary pressure in Britain. This will give the Bank of England a little more flexibility once it decides to normalise interest rates on this side of the Atlantic.”