The question is why? Why was it that not so long ago economists were confidently predicting that average wages would rise while inflation fell?

Okay, we know why they thought inflation would fall, and let’s not go over that old ground. But why did they think wages would rise?

According to the latest data from the ONS, average wages without bonuses rose by a mere 1 per cent in the three months to February. Then, if we take into account bonuses and look at what the ONS calls total pay, we find that rose by just 0.8 per cent. So why had economists previously made such bold predictions? Were they guessing?

Even – let’s emphasis this – EVEN if the most hawkish of inflation watchers had been right, and inflation had fallen below the Bank of England’s target, it is likely that right now wage increases would still be lagging behind inflation.

As it is, in February CP inflation was 2.8 per cent. Wages in the three months to February rose 0.8 per cent on the same period a year ago. That means real wages fell by 2 per cent over the period in question. It was the biggest fall in real wages since March last year.

Many economists have argued that the first sign that the UK economy is turning will occur once wage increases begin to outstrip inflation. Well, based on the latest data, all we can say is that point doesn’t look even close.

This all begs the question: why are so many predicting a pick-up for the UK later this year and next? Are they guessing again?

© Investment & Business News 2013