Third real pay squeeze in a decade as prices outstrip wages

·2 min read
Money-coins and cash
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Households are suffering their third real pay squeeze in a decade after inflation outstripped slowing wage growth in November, piling pressure on ministers and rate-setters to ease the cost of living crisis.

The first signs of falling real wages in official data bolstered the case for another Bank of England interest rate rise to stamp out inflation as the jobs market shrugged off the blow from omicron.

Wage growth including bonuses slowed to 4.2pc year-on-year in the three months to November from 4.9pc, falling below the rate of inflation, according to the Office for National Statistics.

Prices rose by 5.1pc in November with economists expecting inflation to continue soaring this year as energy bills rocket.

It is the third time households have seen pay packets shrink in real terms in a decade after squeezes following the aftermath of the financial crisis and Brexit referendum, according to the Resolution Foundation. Real average weekly earnings slipped back 1pc in November as prices soared.

The figures will increase pressure on the Chancellor, Rishi Sunak, who is planning to hike National Insurance Contributions from April.

Meanwhile, households are facing a further blow from a sharp rise in the energy price cap in April as gas prices surge.

It also boosts the odds of the Bank of England taking action to cool wider price rises at its next meeting in February with a hike in interest rates to 0.5pc expected by markets.

Yael Selfin, chief economist at KPMG, said: “Assuming that [Covid] restrictions are lifted potentially as soon as next week, the labour market could become even hotter, vindicating the Bank of England’s hawkish stance before Christmas.”

Despite the fall in pay, there were signs the jobs market brushed aside the hit from omicron last month. The number of payrolled employees rose by 184,000 in December with all regions of the UK now above pre-Covid levels on the measure.

Unemployment edged down to 4.1pc in the three months to November, down from 4.2pc, while vacancies hit a new record of 1.25m despite growth in job adverts slowing.

However, the economic inactivity rate picked up by 0.2 percentage points to 21.3pc as 66,000 working-age adults left the job market.

There were 459,000 fewer people in work than pre-pandemic levels, driven by people over 50, with a rise in long-term sickness in this group a key factor.

Economists said the figures strengthen the case for the Bank of England’s rate-setters to vote for a second rise in borrowing costs in three months.

James Smith, an economist at ING, said: “Taken with rising headline inflation, that makes a February rate hike look more likely.

“But a severe wage-price spiral looks unlikely, even if pay growth is close to pre-virus rates.”