How well behaved is wage inflation?
Wage inflation in the UK is clearly very low. Chart b shows that wage inflation has not responded to the rise in retail price inflation and this has resulted in a historically wide gap between the two that will squeeze real incomes and so weaken consumer spending and undoubtedly economic growth. Moreover, chart c shows that the UK labour market has been very flexible in the last few years, with wage inflation falling as the economy weakens. This is good news for price inflation as it implies that, as economic growth slows, so too will wage inflation or least it is likely to stay low and not rise as much as it would in the absence of this link. But the reason why wage inflation may have remained well behaved was that inflation expectations were low (they are high at present) and consumer price inflation was not as high as it is currently. Further, price inflation is likely to climb further before subsiding, putting even greater pressure on wages to respond. In addition, UK employment ha
