Wages trail inflation as Brits brace for cost of living crunch to enter most damaging spell

Brits’ spending power is being crimped at a historic rate, but is set to plunge even quicker as the cost of living crunch enters its most damaging period, reveals official figures published today.

Regular pay adjusted for inflation dropped at the fastest pace in nearly a decade over the last quarter to March, falling 1.2 per cent, according to the Office for National Statistics (ONS).

The squeeze on living standards is set to get much worse over the rest of the year, driven by inflation reaching heights that have not been seen in the UK for a generation.

New cost of living figures for April published tomorrow may have climbed to as high as 9.3 per cent, according to a worse case scenario put forward by Deutsche Bank, driven higher by the 54 per cent energy price cap uplift dropping in the same month.

The 1.25 percentage point national insurance rise also took effect from April.

The prediction comes as fresh research from pollster YouGov found over seven in 10 Brits think the government is handling the economy poorly, up over 30 percentage points over the last year.

More than half of people who voted for the Conservatives in 2019 agree the government needs to improve its stewardship of the economy.

“Global challenges are pushing up prices and weighing on growth around the world, but we are continuing to support families, businesses and growth where we can,” a Treasury spokesperson told City A.M.

Bank of England chief Andrew Bailey said yesterday there is nothing the central bank can do to prevent price rises heating up. Threadneedle Street thinks inflation will peak just at over 10 per cent after the summer.

The Bank has raised rates from a 300-year low of 0.1 per cent to a 13 year-high of one per cent in six months. Markets think borrowing costs will top two per cent by the start of next year.

Soaring living costs are expected to wash away households’ spending power at the steepest rate since the mid-1950s, according to Britain’s official forecaster, the Office for Budget Responsibility.

That living standards squeeze is likely to spark a spending cool down and tip the UK into a recession.

Experts warned that the risk of a wage/price spiral hitting the UK due to workers being more sympathetic to the view that inflation will remain high for a while is strengthening.

There are more vacancies than jobless people in the UK for the first time ever, underscoring the scale of wage pressures building in the labour market.

“There is a chance that pay demands could ramp up if workers’ expectations are that inflation will remain higher for longer, potentially triggering a price-wage spiral,” Dr Kemar Whyte, a senior economist at the National Institute of Economic and Social Research, said.

Including bonuses, pay outstripped inflation in the three months to March. The unemployment rate dipped to a near 50-year low of 3.7 per cent.

“Employers appear to be responding to labour shortages by giving large one-off bonuses, instead of raising core wages,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.

Chancellor Rishi Sunak said government intervention had kept the jobs market “robust despite global challenges, with the unemployment rate near record-lows and the number of payrolled employees at a record high”.

However, the absolute number of people in a job is around 450,000 lower than before the pandemic, according to Thomas Pugh, economist at consultancy RSM UK. 

This is due to a large outflow of Brits from the labour market who would be counted as jobless if they were still looking for employment.

Demand for workers remains extremely high, with vacancies jumping to another record of 1.29m. 

However, a smaller workforce is strengthening competition between firms to secure talent, putting upward pressure on wages.

Economic activity is being crimped by businesses struggling to find workers, experts said.

“Labour shortages have become a persistent feature since the pandemic, and a key limiting factor to business growth,” Yael Selfin, chief economist at KPMG UK, said.