However, the overwhelming reason was the decline in global energy and commodity prices. In contrast, many of the domestic factors influencing UK inflation continued to perform poorly. The number of people able and willing to work is still no higher than before the pandemic, largely due to an increase in long-term illnesses.
If the labor supply had evolved along previous trends, the labor force would have grown by about 1 million people. As a result, the recorded unemployment rate rose only slightly.
In this context, it is no surprise that wage inflation in the UK continues to be a serious problem. In June, it reached 9.3%. It currently hovers around 7%, well above the 3% that would be equivalent to achieving the 2% inflation target.
For most of the year, average real incomes were falling because price inflation was faster than wage inflation. The situation started to change in July, when price inflation fell below average wage inflation. After that, real income continued to increase, albeit slowly.
The initial pressure on real incomes was due in part to the slow accumulation of financial burdens as people gradually exited fixed-rate mortgage contracts in the face of much higher interest rates. This meant that expenditures were lower than profits. Still, it managed to rise little by little throughout the year.
It was in the housing market that some of my predictions turned out to be wrong. Home prices fell at the beginning of the year, but have since started to recover.
Interestingly, and not for the first time, other real estate markets, namely commercial markets that include offices, retail, and industrial properties, were different. As expected, the company has been in a tough spot, with prices down 20% since the second quarter of last year.
