As 2011 progresses, inflation continues to roar ahead of pay awards. But could the inflation side of the equation be about to ease off? And could private sector pay awards be about to stage something of a recovery?
UK inflation set to fall back in 2012?
The consensus view among expert commentators is that inflation will fall back in the near future. Mervyn King believes inflation in the UK is now at - or near to - its peak rate. In a speech last month, King said:
The eurozone inflation situation
Over in the eurozone, the view is also that inflation is about to fall back. Incoming European Central Bank (ECB) president Mario Draghi said in his first opening statement yesterday (Thursday 3 November 2011):
UK inflation set to fall back in 2012?
The consensus view among expert commentators is that inflation will fall back in the near future. Mervyn King believes inflation in the UK is now at - or near to - its peak rate. In a speech last month, King said:
[Inflation] is likely to be at, or close to, the peak, and we expect inflation now to start to fall back, as it did in the months following the peak in inflation in September 2008. [...] So it is the outlook for inflation, rather than its current rate, which explains the MPC's decision to resume asset purchases.The BBC's Stephanie Flanders notes that this view is shared by many analysts. Flanders says:
The average prediction for [CPI] inflation in 2012 is now 2.5%, less than half of the latest figure. Unfortunately, they expect inflation to fall for the same reason it fell after 2008 - because of weakening demand in the UK and broader global economy.Retail prices index (RPI) inflation is also expected to plot a downward course throughout 2012, falling from 4.2% in the first quarter of 2012 to 3.2% in the fourth quarter, and averaging 3.6% over the year as a whole. This is according to latest inflation forecasts compiled by XpertHR.
The eurozone inflation situation
Over in the eurozone, the view is also that inflation is about to fall back. Incoming European Central Bank (ECB) president Mario Draghi said in his first opening statement yesterday (Thursday 3 November 2011):
While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%. [...] After today's decision [to cut euro area interest rates to 1.25%], inflation should remain in line with price stability over the policy-relevant horizon. [...] The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materialising, which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely. In such an environment, price, cost and wage pressures in the euro area should also moderate; today's decision takes this into account. Overall, it remains essential for monetary policy to maintain price stability over the medium term, thereby ensuring a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to make its contribution towards supporting economic growth and job creation in the euro area.
Brighter prospects for private sector pay awards in 2012?
But while Draghi expects euro area wage pressures to "moderate," UK private sector pay awards look set to stage something of a recovery in 2012.
Private sector employers forecast that the median pay award will be worth 2.5% in the 2011/2012 wage round (XpertHR Benchmarking subscription required). This is according to XpertHR's survey of private sector pay prospects for 2011/2012, full data from which can be accessed via XpertHR Benchmarking.
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