Wage growth for British workers has slowed as inflation pushed down real earnings to their slowest increase since December 2014.
Average weekly earnings grew by 2.6 per cent in the year to December before inflation is taken into account, according to the Office for National Statistics. However, when the increasing cost of living is added real wage growth was only 1.4 per cent over the year.
Growth in wages has accelerated over the last 12 months from an annual rate of only 1.9 per cent in December 2015, but inflation is expected to rise steadily over the coming year.
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Sterling fell to lows of $1.2407 against the US dollar at the time of writing, with the measure of wage growth lower than expected by investors.
The rate of unemployment stayed steady at 4.8 per cent, its lowest level since September 2005, well before the financial crisis. The employment rate, which measures the proportion of all working-age adults in work, is at its highest since records began at 74.6 per cent.
The Bank of England (BoE) watches the unemployment rate closely when determining monetary policy. The Bank is mandated to balance inflation with long-term unemployment rates.
Consumer prices in January rose at an annual rate of 1.8 per cent, below the Bank of England’s target of two per cent, but most economists predict inflation to rise towards three per cent as the effects of the devaluation of sterling continue to feed through to consumers.
A low unemployment rate might be expected to raise inflation as workers are able to demand higher wages with less competition for jobs.
However, stagnant pay levels prompted the BoE to re-examine the labour market in its inflation report earlier this month. While dramatically upgrading UK growth prospects, the Bank also decided there was more “slack” in the labour market than previously thought.
This extra slack means there is less pressure on wages. Michael Saunders, an external member of the rate-setting Monetary Policy Committee (MPC) said earlier this year that the unemployment rate could stay below five per cent this year without necessitating an interest rate rise.