Inflation and earnings forecasts, 26 April 2013

This page presents the latest earnings and inflation forecasts compiled by XpertHR: a vital resource for employers with forthcoming pay reviews. We also publish our pick of recent forecasts from HM Treasury and business survey projections.

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Inflation forecasts: upward trend in RPI continues

Retail prices index (RPI) inflation rose by 0.1 percentage point to 3.3% in March 2013, and it is expected to nudge slightly higher as we head into the summer months. Updated forecasts from five members of our panel have pushed up the average RPI forecast for each of the remaining quarters of the year. Overall, the panel expects RPI to average 3.4% over the middle of the year, although Deutsche Bank expects it to peak at an average 3.9% in the second half of the year. RPI inflation is forecast to average 3.3% over the course of 2013 as a whole.

Key factors being taken into account by forecasters at present include the recent fall in oil prices - this has already led several major supermarkets to cut petrol and diesel prices - and whether or not, and to what extent, the recent appreciation in sterling is maintained. Economists at HSBC are forecasting an average 0.8% increase in council tax in April, but no change in interest rates this year.

Capital Economics: "Inflation is likely to rise over the next few months and the RPI rate will probably peak over the summer at close to 4%. The recent weakness of the pound will put upward pressure on import prices and slow the fall in inflation thereafter." Forecast: From a high of 3.7% over the second quarter of the year, RPI will follow a downward path over the remainder of the year, ending at an average 2.9% in the final quarter.

Average earnings forecasts: growth unlikely to hit 2% this year

Our quarterly forecasts for average earnings growth have fallen again on the back of lower forecasts from a number of our panel members - including those from Capital Economics, who predict earnings growth of just 0.5% in the second quarter of the year. Average earnings - as measured by the increase in total weekly pay including bonuses - grew by 0.8% in the three months to February 2013 compared with a year earlier.

Good news from the labour market in the form of a marked increase in employment levels at the end of 2012 is likely reflected in lower earnings growth, as employers held on to jobs to the detriment of pay awards. Pay settlements remain subdued as we enter the busy April bargaining round, with a median award of just 2% recorded by XpertHR for April 2013 awards concluded so far, while growth in employment stalled in the quarter to February 2013.

Although the rate of employment growth is expected to slow, it is above the level that would normally be expected in the current economic climate. As the ITEM Club comments: "[Last year] employment increased by 2% (comparing the November 2012-January 2013 average with its level a year earlier). The forecast sees a more modest growth of 0.9% in employment this year, with another 1.2% growth in 2014."

Capital Economics: "Despite the worsening inflation outlook, pay growth has slowed even further and is likely to remain at these sluggish rates for the rest of the year." Forecast: Average earnings growth to fall to just 0.5% over the second quarter of the year.

ITEM Club: "Annual earnings growth is still very weak. Given the public-sector pay freeze and that unemployment is still elevated above historical norms, private-sector pay settlements are unlikely to pick up to any great extent. So earnings growth is forecast to remain subdued for a prolonged period." Forecast: Earnings growth will increase gradually throughout 2013, but the 1.9% forecast average for the year is low by historical standards.