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UK basic pay falls behind inflation at fastest rate in eight years

The UK unemployment rate fell to 3.9% in the three months to January, while real regular pay slumped by 1%, according to the ONS. Photo: John Sibley/Reuters (John Sibley / reuters)

The UK’s pay squeeze tightened at the start of the year as wages fell at the fastest rate since 2014.

The Office for National Statistics (ONS) said the unemployment rate fell to 3.9% in the three months to January, dropping below the 4% rate from February 2020, before the COVID pandemic hit the UK.

Payroll numbers climbed 275,000 in a month to reach 29.7 million in February, and vacancies struck a new high of 1.3 million.

However, while vacancies and payroll numbers have hit record highs, real regular pay slumped by 1%, the biggest fall since 2014.

Average earnings, excluding bonuses, climbed 3.8% in the three months to January, up from 3.7% the month before.


But all these gains were wiped out by record high inflation, meaning that wages actually fell by 1% in real terms.

Read more: Benefits: Tax credit cuts wipe out minimum wage raises for poorest households

This refelcts the continuing squeeze on households, with more to come as inflation is expected to continue to outpace growth and hit 7% in the coming months.

Nye Cominetti, senior economist at the Resolution Foundation, said: “Britain’s real pay squeeze, which started as far back as summer 2021, will get deeper in 2022, and is unlikely to end until summer 2023.”

Total pay, which includes bonuses, was lifted by strong growth in the financial sector, where bankers saw the biggest bonuses since the financial crisis.

Wages including bonuses were up by 4.8%, representing a 0.1% real terms increase.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Bumper bonuses are skewing pay figures, so on initial glance everything in the jobs market looks rosy.

“However, something far more worrying is lurking underneath the headline figures, because once you take inflation into account, pay excluding bonuses has fallen faster than at any time for almost eight years. Unless you’re one of the lucky few taking home a bumper bonus this winter, you’re in for a horrible battle to make ends meet this spring."

Kemar Whyte, senior economist at NIESR, said: "With developments in Ukraine expected to further boost households’ energy bills, workers should expect an even tighter squeeze on their real income.”

Real income squeeze gets tighter. Chart: NIESR Monthly Wage Tracker
Real income squeeze gets tighter. Chart: NIESR Monthly Wage Tracker

Public sector workers are being particularly hit by the cost of living squeeze, the labour market report shows.

Average total pay growth for the private sector was 5.3% in the three months to January 2022, but just 2.4% in the public sector.

Read more: Energy bills set to rise at least 14 times faster than wages in 2022

TUC general secretary Frances O’Grady said: "Working people deserve financial security and a wage they can live on.

“But instead, they are facing the steepest decline in real pay for eight years, and a cost of living crisis that will get worse if the government doesn’t act now.

“Energy bills will rise at least 14 times faster than wages this year. Household budgets are already stretched to the brink and can’t take any more."

Analysts say the Bank of England is likely to increase interest rates again on Thursday in response to soaring inflation.

Ben Harrison, director of the Work Foundation, a think tank for improving work in the UK, said “Most workers are facing real terms pay cuts as while regular wage growth (without bonuses) stands at 3.8%, the Bank of England is predicting that inflation will peak at 7.25% in April.

"Rising prices and the energy cap increase in April will affect all households across the UK, but it will acutely impact those in low paying and insecure employment.”

The figures are the last set of job and wage data before the spring statement next week, which is expected to see chancellor Rishi Sunak unveil the latest economic forecasts.

“To provide security as the cost of living and global uncertainty hit households, the chancellor has the opportunity at the spring statement to harness the ambition and zeal that he demonstrated in March 2020 when he introduced the furlough scheme to protect income and living standards.

"At a minimum, the government should provide targeted support to those most at risk by uprating universal credit to the predicted levels of inflation rather than the 3.1% currently planned in April.”

Sunak said the government’s economic support measures had driven a stronger jobs rebound than many observers predicted.

“I am confident that our labour market is in a good position to deal with the current global challenges,” he said.

“We know people are concerned about the rising cost of living so alongside continuing to help people find great jobs we’re providing direct support worth more than £20bn this financial year and next.”

Although the economic output is now slightly higher than before the pandemic, its labour force has shrunk — largely due to workers aged 50 and over dropping out, often to retire early.

Commenting on the figures, British Chambers of Commerce’s head of economics, Suren Thiru, said: “Although the latest jobs data provides no impediment to raising interest rates, concern over the impact of Russia’s invasion of Ukraine may give the Bank of England pause for thought over further monetary tightening.

“We urge the chancellor to use next week’s spring statement to delay the national insurance rise by one year to give firms the financial headroom to weather this surge in costs facing businesses and support the wider economy.”

Watch: How does inflation affect interest rates?