British real wages are officially rising again but sterling falls back after growth misses expectations

Jasper Jolly
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Consumer prices have outstripped wage growth over the past year (Source: Getty)

Britons' pay packets grew by 2.8 per cent in the year to February, officially ending a year of real wage falls as salary increases have finally overtaken price rises.

The Office for National Statistics today reported that average weekly earnings for employees in Great Britain increased by 2.8 per cent, both excluding and including bonuses. The growth in regular pay was the fastest in 30 months.

Unemployment figures, also released today, fell to a new post-1975 low of 4.2 per cent in February, down from 4.3 per cent in the previous month.

A graph showing real wages finally turning positive

Read more: Pound reaches new post-Brexit-vote high as traders wait for key wages data

Economists had expected earnings including bonuses to rise by three per cent, with traders selling the pound in the immediate aftermath of the release. Sterling had earlier hit its highest point since the Brexit vote.

Consumer prices rose by 2.7 per cent in the year to February, after peaking at an annual rate of 3.1 per cent in November mainly owing to the sharp devaluation of sterling in the aftermath of the EU referendum result.

Jeremy Cook, chief economist at payments firm Worldfirst, said: “It will take a few more data cycles to be sure, but the real wage squeeze on the average UK worker is coming to an end.

"While most of this improvement has been due to a collapse in inflation – something that should be shown to have continued tomorrow – businesses are paying higher wages as the labour market in the UK tightens."

Expectations of an interest rate hike at the next Bank of England monetary policy committee (MPC) meeting on 10 May have risen as policymakers have highlighted signs of rising inflationary pressure on the home front, rather than depreciation effects.

Read more: Unemployment in the UK reaches new four-decade low

"The UK seems to be approaching full employment," said Kallum Pickering, senior UK economist at Berenberg. "The sustained global backdrop and stable growth at home provides sufficient grounds for the Bank of England to hike again in May."

The MPC's nine members voted by seven to two to keep rates steady at their March meeting, but said the May decision would allow a "fuller assessment" of how the economy is doing, after previously saying the market was not pricing in enough interest rate hikes.

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, warned that a fall an indicator cited by the MPC could give them pause. The annualised rate of three-month-on-three-month growth in private-sector wages, excluding bonuses, slowed to a 10-month low of just 2.5 per cent. "This won’t go unnoticed by the MPC," he warned.

Suren Thiru, head of economics at the British Chambers of Commerce, said: "The end of a prolonged squeeze on real wage growth is an important moment, although maintaining positive real wage growth could prove challenging without sustained increases in productivity and relieving the high upfront costs which restrict pay increases."

Read more: Ian McCafferty: Bank of England "shouldn't dally" over next rate hike

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