We all know that prices are rising. The latest Consumer Prices Index (CPI) - the Government's target measure - showed an annual rate of increase of 3.8 per cent in June, up from 3.3 per cent in May.
The largest upward pressure came from food and non-alcoholic beverages. Increasing fuel prices also played apart. On the other hand there is greater price discounting on clothing and footwear prices than last year; the price of spirits has also decreased this year.
The Retail Prices Index (RPI) measure of inflation - the number favoured by union wage negotiators - rose to 4.6 per cent in June, up from 4.3 per cent in May. This measure includes mortgage costs. Interestingly these are increasing at a lower rate than last year; house depreciation is also holding down the rate of increase. This is shown by the comparison with RPIX - the all items RPI excluding mortgage interest payments - which was 4.8 per cent in June, up from 4.4 per cent in May.
If it is any consolation, UK CPI inflation is below the average for the European Union as a whole, which at the end of May, was about 4.0 per cent.
Meanwhile, despite the 'special case' tanker drivers eye-watering 7% plus increase a few weeks ago, the median for pay settlements - as reported by IRS - was around 3.2% for the three months ended in June. This was actually lower than the median of 3.5% reported for the first three months of the year. To some extent this is being influenced by the generally lower level of public sector pay deals. Take the public sector out of the mix and the median level of pay increase was about 3.4%.
The current gap of over 1% between median pay rises and the RPI is the largest since 1990. It will be interesting is to see how this gap moves over the months ahead. In reality, with most of the 2008 pay round already over, the next key period when this will be tested will be in late 2008/ early 2009 when the next pay round gets underway in earnest. If pay levels stay at or around the current levels maybe this will be the trigger for interest rates to start coming down (and maybe the banks will pass some of this on to borrowers); if it looks like pay settlements are going to leap up then it is pretty clear that interest rates will at least stay at the current level or start to increase. And then we will have a recession. Meanwhile the level of unemployment is on a knife-edge. The number of individuals claiming benefit is edging up but record numbers are still employed. The fear of job loses will modify some pay expectations. On the other hand, as inflation bites hardest at lower and middle earners, the pressure will be on all employers 'to make good'. At the heart of it will be the actions of an embattled Government and the tussle it is inevitably going to have over public sector pay in the months ahead.
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