Pay packets already shrinking as record run of low inflation ends

Here, we look at how the UK economy has recovered after Brexit to give workers a better pay packet against inflation rises.

Real earnings falls have arrived earlier than expected as inflation has risen above the Bank of England’s target for the first time since December 2013, the Resolution Foundation says in response to the latest inflation figures.

Inflation had been below the Bank’s 2 per cent target for a record 38 months, driving recent income growth and amounting to a cumulative 3.9 percentage points undershoot compared to being in line with the target throughout this period.

With nominal pay so far failing to respond to rising inflation, the Foundation’s pay projection shows that real earnings growth dropped to around zero in February, and is likely to have fallen in March (projected to come in between -0.3 per cent and 0 per cent).

The Foundation welcomes the ONS’ decision to switch to CPIH as its official inflation measure as it better captures housing costs – a key factor for household finances.

Stephen Clarke, economic analyst at the Resolution Foundation, says, ‘After 38 months inflation is back above the Bank’s target, bringing to an end the era of ultra-low inflation that has boosted living standards in recent years. Today’s rapid increase is part of a wider trend with price rises set to the big living standards story of this year.

To date pay settlements have failed to respond to rapidly rising prices, meaning there’s a good chance pay packets are already shrinking in real terms.

While there is little that can be done to prevent oil price rises and a falling pound driving up inflation, today’s figures reinforce the risks to living standards of weak wage rises, especially in the context of the recent slowdown in employment growth.

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