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Income squeeze begins to ease

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

You may not have noticed it yet but you’re probably getting a bit richer. This week we learned wages have continued to move upwards, while inflation has remained stable and comfortably within the Bank of England’s 2% target.

Income squeeze begins to ease

This means for many, the income squeeze is beginning to ease. Real, inflation-adjusted incomes have continued to grow solidly after wages rose by 3.4% in the three months to January and the unemployment rate fell to a 44 year low of 3.9%. The number of people working in Britain is now 76.1% of the workforce, the highest figure since records began in 1971.

So, if like me, you’re under 48 years old (only just) you’ve never had it so good.

Or have you? It certainly doesn’t feel that way. Looking at the state of the high street and the ongoing political uncertainty, there doesn’t appear to be a lot of confidence out there. What’s more when it comes to the stock market, there are few signs of the ‘irrational exuberance’ Fed chairman Alan Greenspan observed during the 1990s dot-com boom. 

The reason is wages. When adjusted for inflation, wages still remain below the highs witnessed before the financial crisis ten years ago. In effect a decade has been lost due to earnings stagnation.

Today the Office for National Statistics (ONS) said inflation edged higher in February, up by 1.9% as lower price rises than last year in clothing and footwear offset pressure from food, alcohol and tobacco.

Inflation - the increase in the prices of goods and services - can be both friend and foe. It all depends on how much you have of it and whether you’re a saver or a spender.

A little inflation is a good thing. It’s a sign of an improving economy and it means that your debts - providing your income rises in line or above the rate of inflation - will reduce over time in real terms. Those that bought a house in the 1970s will know first-hand how the value of their mortgage debt decreased in real terms as their wages increased. Governments also welcome some inflation as they see the value of their borrowing reduce too.

However it’s a different story for savers, or those on a fixed income, who experience prices rising faster than their income. If you’re in that situation - it’s worth remembering that if inflation rises over the Bank of England’s preferred rate of 2% - the main tool the Bank has to dampen down inflation is to raise interest rates.

On Thursday the Bank of England will give its latest verdict on the path of UK interest rates and it is widely expected that they’ll remain unchanged.

For investors, this means the message of lower rates for longer also remains unchanged. For the last ten years since rates fell in response to the financial crisis, investors have been forced to look beyond the safe, yet meagre, returns offered by cash deposits towards the riskier stock market.

With the blue-chip companies making up the FTSE 100 currently offering an average yield of 4.4%,1 though this income is not guaranteed, it is easy to see why income-seekers are looking towards good quality companies with a history of paying a regular, often growing, dividend.

With the ISA deadline now less than three weeks away, it’s worth remembering that equity income funds - funds that invest in these types of companies - can be held within a Stocks and Shares ISA.

Our Select 50 list includes a number of equity income funds. The following three look for opportunities in the UK:

The Fidelity Enhanced Income Fund, run by Michael Clark, aims to deliver a higher yield than would otherwise be produced by its dividend-paying investments. It does this by selling to other investors the right to buy the portfolio’s holdings at a slightly higher price in the future. The premiums gathered in this way are used to increase the fund’s yield.

The Franklin UK Equity Income Fund, managed by Colin Morton, aims to provide a growing level of income which is higher than that of the FTSE All-Share, together with capital growth over the medium to long term. When asked about the outlook for UK shares in a recent interview he said: “As an income investor my glass is half-full right now. There are lots of good companies offering really good yields and the outlook is good”. You can watch the interview here.

The JOHCM UK Equity Income Fund is managed by James Lowen and Clive Beagles, who look for dividend-paying companies which are expected to yield more than the market average over the next 12 months and which have the ability to grow their earnings and dividends over time.

Don’t forget the deadline for this year’s ISA is 5 April 2019.

Find out more ISA fund ideas

Source:, 20 March 2019

Important information

The value of investments can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt we recommend that you seek advice from an authorised financial adviser.