Workers may be delighted by the latest figures from the Office for National Statistics which shows year-on-year wage growth of 8.2% including bonuses and 7.8% excluding them.
However, neither the Bank of England nor financial markets seem quite so pleased, as the result could be interest rates going higher than expected for longer than expected.
The good news for hard-pressed families is the gap between wage increases and inflation is finally closing and fast.
A series of settlements for the public sector means pay rises here are finally starting to catch up with those awarded in the private sector.
At the same time, inflation has been cooling and when it studies today’s (Weds) latest data, the Bank of England will be hoping to see a further slowdown in the headline rate, which has already come down to 7.9% from last autumn’s peak of 11.1%.
However, Governor Andrew Bailey and his colleagues on the Monetary Policy Committee have already warned about the potential dangers offered by lofty pay increases and uncomfortable echoes with the 1970s, when a spiral of higher prices and higher wages took inflation above 20% and interest rates into the mid-teens.
Sharp drops in oil and gas from last year’s peaks have helped to cool the headline rate of inflation, but the core figure – which excludes energy, food, alcohol and tobacco – has not come down anywhere near as much.
This suggests inflation is becoming entrenched as once the public gets used to paying higher prices, and gets the wage increases to meet them, then reining them in could prove even harder.
That is why financial markets think the Old Lady of Threadneedle Street will raise interest rates by 0.25% to 5.5% in September and take them all the way to 6% by Christmas, with a first cut only expected next summer.
Mr Bailey and his colleagues want to dampen demand by increasing the amount of interest consumers pay on their borrowings, particularly mortgages, as this will leave them with less disposable income.
That in turn helps to explain the FTSE 100’s plunge on Tuesday.
The higher interest rates go, the better the returns savers can get on their cash (at least in theory) and that means they may be less inclined to look at other options, such as shares, which can offer high returns but come with higher risk.
It also increases the risk of an economic slowdown or downturn that could hit companies’ profits and their ability to pay dividends to shareholders.
