Cost of Living: Real wages may start increasing 'in near future', experts predict

·4-min read
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The UK is by no means out of the woods yet, but real wages could make a positive turn in the not too distant future. (Getty Images)

The past year has been characterised by soaring inflation and a record drop in living standards that will have many people crying out for some good news.

Britain is still very much in the midst of a cost of living crisis, with wages failing to keep up with the price of everyday essentials - but a change could be on the horizon, experts have suggested.

New analysis of the labour market by the Office for National Statistics (ONS) shows that growth in average pay for private and public sector employees in January to March was 6.7%.

That was up ever so slightly from the 6.6% recorded in the three months to February.

Adjusted for inflation, however, this amounts to a 2% drop in real terms. A similar fall was recorded in the previous three months and remains among the largest falls in growth since comparable records began in 2001.

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Figures show the gap between public and private sector pay growth is narrowing sharply. (Resolution Foundation)

However, this pattern could be about to change, with the Bank of England expecting inflation (currently 10.1%) to fall to around 5% by the end of this year, with the central bank finally reaching its target of 2% by late 2024.

Commenting on the ONS's latest findings, Hannah Slaughter, senior economist at the Resolution Foundation, said: "On pay, earnings growth is still being outpaced by inflation.

"But a relatively strong growth rate of 6.7%, combined with (hopefully) falling inflation in the next few months, means we could see a return to real pay growth in the near future."

While real terms pay is still falling, the rate at which it is growing is picking up in both public and private sectors, the ONS found.

Public sector pay grew by 5.6% in the year to March - the highest rate since August to October 2003 - off the back of weak growth since the start of the COVID-19 pandemic.

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Months of public sector strikes have led to a rapid increase in lost working days. (Resolution Foundation)

That's compared to 7% for the private sector - showing a narrowing in the gap in pay growth between both sectors.

"This growth in public sector pay in particular may go some way to easing the recent wave of strike action - 0.6 million days were lost to strikes in March - though this is of course linked to wider terms and conditions as well as pay," Slaughter added.

That was up from 332,000 in February and brought the total of missed work days for the year to date to 1.1 million.

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Despite some positive signs for the future, the UK's job market is still in a precarious position after another surprise rise in the unemployment rate and the first fall in payrolled workers for more than two years.

In addition, a record number of people could be worse off after being dragged into a higher tax bracket via Chancellor Jeremy Hunt's so-called "stealth tax".

ONS figures showed the rate of UK unemployment rose to 3.9% in the three months to March, up from 3.8% in the previous quarter and the highest level since the three months to January 2022.

ONS https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/may2023
Real pay remains stubbornly low compared to inflation, but forecasts suggest a positive turn lies ahead. (ONS)

PAYE figures indicated the first fall in workers on payrolls since February 2021, estimating a 136,000 fall to 29.8 million.

Meanwhile, the number of vacancies fell by 55,000 quarter on quarter to 1.08 million in the three months to April amid “uncertainty across industries”.

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Experts said the cooling jobs market may give the Bank of England reason to pause its campaign of interest rate rises, following last week’s 12th hike in a row, to 4.5%.

Chancellor Jeremy Hunt said: “It’s encouraging that the unemployment rate remains historically low but difficulty in finding staff and rising prices are a worry for many families and businesses.”

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