Wage inflation is rising. The ONS could report next Tuesday that pay excluding bonuses rose by 3.2 per cent in the last 12 months, the fastest annual increase since 2008. Other figures that day will show one reason for this: the unemployment rate might drop below 4 per cent for the first time since 1974 – although there are also 1.9m out of the labour force who want to work.
This increase is not yet pushing up inflation. Wednesday's figures could show that CPI inflation rose only slightly last month to 2.5 per cent, and that was due to higher petrol prices and air fares. Other numbers will show that manufacturing output price inflation has moved sideways since May at just below 3 per cent, although input prices are up almost 10 per cent year on year.
In this context, productivity growth is crucial. Pay rises need not be inflationary if they are offset by efficiency gains. We might, however, get some bad news here on Wednesday. Hours worked are likely to have risen in the third quarter, which would imply that the productivity rises we saw earlier this year have finished.