Strong wage growth may boost state pensions in 2024
The consumer prices index (CPI) rose by 6.8% in the 12 months to July 2023, down from 7.9% in June and at its lowest rate since March 2022.
The monthly fall was 0.4% in July 2023, with falling gas and electricity prices providing the greatest contributions to the fall in annual rates.
This may suggest that the cost of living crisis may be coming to an end – the ONS published annual average wage rises of 8.2% yesterday – but commentators are warning that inflation won’t fall dramatically and that households remain under immense pressure.
David Henry, investment manager at Quilter Cheviot, said: “The headline numbers only tell a fraction of the story. Food prices continue to hit consumers, while core inflation is refusing to budge substantially.
“With the surprise in earnings growth added in and the economy holding up in the face of adversity, the Bank of England (BoE) will probably determine that more interest rate rises are required to get the job done.”
However, with rates rising for more than 18 months, now is the time they will tend to be felt, said Henry.
“Given the speed in which rates have reached more than 5%, the toll on the economy in the next few months could be quite severe and may be enough to tip the country into a recession.
“With the Federal Reserve now increasingly looking like they may now pause interest rates rises, this could naturally feed into the BoE’s thinking given how they have seemingly followed in the Fed’s footsteps in the past.
“But with inflation remaining especially elevated, and this being the primary reason for rate rises to date, the BoE is left in somewhat of a no-win situation.”
Every cloud has a silver lining
The Bank may find itself caught in a cleft stick, but state pensioners may be one group to benefit from the volatility in the market.
But Dean Butler, managing director for retail direct at Standard Life, warned that continued strong wage growth could undermine the long term affordability of the state pension triple lock.
“The state pension currently accounts for around £124 billion of government spending,” said Butler, “so if it rises by 8.2% from next April, that will take the cost to just over £134 billion
“It’s recently been reported that this would make it more expensive than the day to day budgets of the Department for Education, Home Office and Ministry of Defence combined.”
There are, of course, a number of moving parts that will determine the outcome and inflation may rise again before it falls. But the long term consequences for the triple lock will be determined by the duration of both high inflation and high average wage growth.
“While the government put a pause on state pension reform earlier this year, and are unlikely to review this in the short term, consistent upwards pressure from either angle could force the government to reconsider,” added Butler.
More volatility to come
The stakes are high for state pensioners, said Steven Cameron, pensions director at Aegon and warns them to be prepared for continued volatility before the triple lock is confirmed in the autumn.
“With so much volatility, the state pension triple lock has become quite the roller coaster, so it’s time to ‘hold onto your hats’ for a couple of months.
“The final earnings component will be announced next month and the final inflation figure in October. But after a double digit 10.1% increase in April 2023, state pensioners could be in for an inflation busting boost in April 2024.”
