Real wages fall at fastest pace in nearly three years as Britons feel the inflation squeeze

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The Chancellor Today Gives His Last Pre Budget Report Before The Election
Real wages have fallen further (Source: Getty)

Real wages are falling at the fastest pace for three years as the pressure of rapidly rising prices threatens to squeeze Britons' ability to keep up growth-boosting spending.

Regular pay increased by only 1.7 per cent in February to April this year compared to the same period last year, the weakest rate of growth since January 2015, according to the Office for National Statistics (ONS), while pay including bonuses rose by 2.1 per cent.

Read more: Inflation jumps to hit four-year high of 2.9 per cent

Inflation far outstripped that, with prices rising by 2.7 per cent in the year to April, raising fears the UK economy will slow further in the coming months.

Stephen Clarke, economics analyst at the Resolution Foundation, said: "Britain is in the middle of a pay squeeze that is far deeper than anyone expected. What’s most concerning is that while inflation continues to rise, wage growth is actually weakening and making the household income squeeze even tighter."

Regular pay growth slowed from a 2.1 per cent annual rate in March, despite a labour market which has exhibited outward signs of tightness, which theoretically should push wages up.

Unemployment remains at 4.6 per cent, its joint lowest since 1975, while the employment rate stayed at a record high of 74.8 per cent, the ONS reported.

Maike Currie, investment director for personal investing at Fidelity International, said: “Rising inflation and weak wage growth means UK real earnings are falling at the fastest pace in three years. The wages we are earning are not nearly keeping up with the price of goods and services we consume, tightening the squeeze on UK household finances."

Real wage growth had recovered slowly to reach a peak of 2.6 per cent in the summer of 2015 as plummeting oil prices held down inflation. However, since then rising oil prices followed by the impact of sterling's devaluation after the EU referendum have seen inflation surge.

Read more: Bank of England holds: Real wage fall prompts growth forecast downgrade

The weakness of real wage growth has been a key issue for the Bank of England, which has determinedly kept its key interest rate, bank rate, at historically low levels despite rising inflation.

Strong consumer spending in the aftermath of the EU referendum was a key driver of the UK economy's acceleration in the second half of 2016, surprising the Bank's economists, who expected spending to fall immediately.

However, markets reacted to the referendum with a massive devaluation of sterling, which has gradually fed through into sharply higher prices.

The resulting squeeze on disposable incomes has led the Bank of England to predict slowing consumer demand and a slower overall economic growth, making the Bank of England extremely unlikely to raise interest rates any time soon. Monetary policymakers hold their latest meeting today, with an announcement at midday tomorrow.

Read more: Consumer spending dips for first time in almost four years

Rhys Herbert, senior economist at Lloyds Bank Commercial Banking, said: “As there were also signs that employment growth is slowing, the data generally supports the view that domestic inflationary pressures remain under control. That will help boost the confidence of the majority on the MPC that they can safely leave interest rates unchanged for now even though inflation has moved further above target.”

The prospects for real wage growth are likely to be worse in the coming months, with the rate of price increases already rising further to hit 2.9 per cent in May, according to data released yesterday.

Sterling fell against the US dollar after the data were released, undoing the gains since Tuesday evening to trade at around $1.273 at the time of writing.

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