Inflation and earnings forecasts, 26 April 2013

This page presents the latest earnings and inflation forecasts compiled by XpertHR: a vital resource for employers with forthcoming pay reviews. We also publish our pick of recent forecasts from HM Treasury and business survey projections.

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Chart 1: Inflation and earnings forecasts

Inflation forecasts: upward trend in RPI continues

Forecast: Not only did RPI rise slightly this month, but the consensus is that it will continue rising over the next few months.

Updated this month: Capital Economics, Deutsche Bank, Ernst & Young ITEM Club, Goldman Sachs, HSBC.

Retail prices index (RPI) inflation rose by 0.1 percentage point to 3.3% in March 2013, and it is expected to nudge slightly higher as we head into the summer months. Updated forecasts from five members of our panel have pushed up the average RPI forecast for each of the remaining quarters of the year. Overall, the panel expects RPI to average 3.4% over the middle of the year, although Deutsche Bank expects it to peak at an average 3.9% in the second half of the year. RPI inflation is forecast to average 3.3% over the course of 2013 as a whole.

Key factors being taken into account by forecasters at present include the recent fall in oil prices - this has already led several major supermarkets to cut petrol and diesel prices - and whether or not, and to what extent, the recent appreciation in sterling is maintained. Economists at HSBC are forecasting an average 0.8% increase in council tax in April, but no change in interest rates this year.

Capital Economics: "Inflation is likely to rise over the next few months and the RPI rate will probably peak over the summer at close to 4%. The recent weakness of the pound will put upward pressure on import prices and slow the fall in inflation thereafter." Forecast: From a high of 3.7% over the second quarter of the year, RPI will follow a downward path over the remainder of the year, ending at an average 2.9% in the final quarter.

Table 1: Forecast of annual rate of change in retail prices, 20131

  2013
Q2 (%) Q3 (%) Q4 (%) Year (%)
Capital Economics 3.7 3.5 2.9 3.4
CBI 3.3 3.2 2.8 3.1
Deutsche Bank 3.6 3.9 3.9 3.7
Ernst & Young ITEM Club 3.4 3.3 3.0 3.2
Goldman Sachs 3.4 3.5 3.5 3.4
HSBC 3.3 3.2 3.2 3.3
NIESR - - - 3.5
Oxford Economics 3.2 3.0 2.6 3.0
Royal Bank of Scotland 3.4 3.5 3.1 3.3
UBS 3.5 3.7 3.7 3.5
XpertHR average2 3.4 3.4 3.2 3.3
Range of forecasts 3.2 to 3.7 3.0 to 3.9 2.6 to 3.9 3.0 to 3.7
1. Based on the latest figures available as at 11 April 2013.
2. XpertHR average: unweighted average of the analysts' predictions.

Source: XpertHR.

Average earnings forecasts: growth unlikely to hit 2% this year

Forecast: Average earnings growth continues to slow, while employment growth surprises on the upside.

Updated this month: Capital Economics, Deutsche Bank, Ernst & Young ITEM Club, Goldman Sachs, HSBC.

Our quarterly forecasts for average earnings growth have fallen again on the back of lower forecasts from a number of our panel members - including those from Capital Economics, who predict earnings growth of just 0.5% in the second quarter of the year. Average earnings - as measured by the increase in total weekly pay including bonuses - grew by 0.8% in the three months to February 2013 compared with a year earlier.

Good news from the labour market in the form of a marked increase in employment levels at the end of 2012 is likely reflected in lower earnings growth, as employers held on to jobs to the detriment of pay awards. Pay settlements remain subdued as we enter the busy April bargaining round, with a median award of just 2% recorded by XpertHR for April 2013 awards concluded so far, while growth in employment stalled in the quarter to February 2013.

Although the rate of employment growth is expected to slow, it is above the level that would normally be expected in the current economic climate. As the ITEM Club comments: "[Last year] employment increased by 2% (comparing the November 2012-January 2013 average with its level a year earlier). The forecast sees a more modest growth of 0.9% in employment this year, with another 1.2% growth in 2014."

Capital Economics: "Despite the worsening inflation outlook, pay growth has slowed even further and is likely to remain at these sluggish rates for the rest of the year." Forecast: Average earnings growth to fall to just 0.5% over the second quarter of the year.

ITEM Club: "Annual earnings growth is still very weak. Given the public-sector pay freeze and that unemployment is still elevated above historical norms, private-sector pay settlements are unlikely to pick up to any great extent. So earnings growth is forecast to remain subdued for a prolonged period." Forecast: Earnings growth will increase gradually throughout 2013, but the 1.9% forecast average for the year is low by historical standards.

Table 2: Forecast of annual rate of change in average earnings, 20131,2

  2013
Q2 (%) Q3 (%) Q4 (%) Year (%)
Capital Economics 0.5 0.6 1.2 1.0
CBI 1.7 1.9 1.9 1.7
Deutsche Bank 1.4 1.8 2.6 2.0
Ernst & Young ITEM Club 1.7 2.1 2.3 1.9
Goldman Sachs 1.2 1.4 2.0 1.7
HSBC 1.5 1.7 1.6 1.6
NIESR3 - - - 1.8
Oxford Economics 2.1 2.1 2.3 2.4
Royal Bank of Scotland 2.8 2.9 2.9 2.8
UBS 2.0 2.3 2.4 2.3
XpertHR average4 1.7 1.9 2.1 1.9
Range of forecasts 0.5 to 2.8 0.6 to 2.9 1.2 to 2.9 1.0 to 2.8

1. Based on the latest figures available as at 17 April 2013.
2. Forecasts are based on the total pay measure from the average weekly earnings series.
3. Based on National Accounts data, which is defined as employee compensation per employee job, taking into account items such as pensions costs and national insurance contributions.
4. XpertHR average: unweighted average of the analysts' predictions.

Source: XpertHR.

Table 3: Pick of the forecasts, March 2013

Source Time period Measure Forecast Updated
INFLATION
HM Treasury1 Q4 2013 RPI inflation 3.2% Monthly
HM Treasury Q4 2013 CPI inflation 2.7% Monthly
HM Treasury Q4 2014 RPI inflation 3.1% Monthly
HM Treasury Q4 2014 CPI inflation 2.5% Monthly
AVERAGE EARNINGS
HM Treasury 2013 Average earnings growth 1.9% Monthly
HM Treasury 2014 Average earnings growth 2.5% Monthly
LABOUR MARKET
Manpower employment outlook survey Q2 2013 Forecast change in headcount compared with previous quarter

11% of employers forecast an increase; 5% anticipate a decrease; 82% predict no change (2% don't know).

Net employment outlook: +6% (not adjusted for seasonal variations)

Quarterly
HM Treasury Q4 2013 Claimant count unemployment 1.59 million Monthly
HM Treasury Q4 2014 Claimant count unemployment 1.55 million Monthly
PAY AWARDS
XpertHR pay forecasts survey 12 months to 28 February 2014 Median pay award (private sector only) 2.5% Twice yearly
CIPD labour market outlook 12 months to September 2013 Mean basic pay increase (excluding bonuses) 1.7% Quarterly

1. For all Treasury forecasts, the average of independent forecasts made over the past three months is used.

Sources: HM Treasury - Forecasts for the UK Economy, April 2013; Manpower Employment Outlook Survey, Q2/2013; XpertHR pay forecasts survey, March 2013; Labour Market Outlook, Chartered Institute of Personnel and Development (CIPD) in partnership with SuccessFactors, winter 2012-13.