Inflation crisis wipes out 16 years of pay growth

commuter london bridge
commuter london bridge

Workers have suffered the sharpest hit to their real wages on record with a 4pc drop that sent pay back to the same level as 2006.

Regular pay packets are no bigger now than they were before the financial crisis after accounting for soaring inflation, according to the Office for National Statistics.

Real terms pay was 4.1pc lower in the three months to June than in the same period of 2021, the sharpest annual drop since records began in 2001 as inflation hit a four-decade high of 9.4pc.

The squeeze is set to intensify as energy bills rise in October and January, with consultancy Auxilione predicting the household price cap could hit £5,500 next April.

There are already signs that the crisis is driving older people back to work to pay their bills. A record 173,000 over-65s joined the workforce in the quarter.

Nye Cominetti, economist at the Resolution Foundation, said that Britain is on track for two lost decades of pay growth after a slump in productivity performance since the financial crisis.

Around 8m younger workers in Britain have never experienced sustained real wage growth as a result, he said.

Mr Cominetti said: “Average pay levels are unlikely to return to pre-financial crisis levels until the mid-2020s, resulting in an unprecedented 20-year pay slump.

“It is hard to overstate quite how catastrophic this period has been for living standards, and the wider health of the economy."

The average worker earns £611 a week or around £31,800 a year. If wages had kept rising at the trend rate from before the financial crisis they would be £177 a week or £9,200 a year better off, according to the Resolution Foundation.

Martin Beck, chief economic adviser to the EY Item Club, said the picture will look even bleaker in coming months because last year’s furlough scheme depressed some workers’ earnings in 2021, a distortion which potentially flatters the current figures. He added: “It will get worse before it gets better.”

In cash terms, average regular earnings in the three months to June were up by 4.7pc on the year.

But inflation accelerated to 9.4pc in June, leaving those pay packets worth 4.1pc less in real terms.

The Bank of England expects inflation to accelerate further in the months to come, peaking at more than 13pc in the autumn.

Given rising bills and the growth in cash payments to workers — even though these are not keeping up with inflation — the Bank is increasingly likely to raise interest rates by another 0.5 percentage points in September, said Ruth Gregory at Capital Economics.

Wage growth of 3-3.5pc would be consistent with the Bank's 2pc inflation target, MS Gregory said, meaning she expects interest rates to rise to 3pc in the first half of next year despite a looming recession.

Employment rose by 160,000 in the three months to June, to 32.8m, though this is still 281,000 below the peak of 33.1m people who were in work on the eve of the pandemic.

Unemployment edged up by 35,000 on the quarter to 1.29m, which translates to a rate of 3.8pc. The number of available job vacancies slipped to 1.28m in July, down from a peak of 1.36m in April but still high by historical standards.

The jump in the number of people in work was driven by a 173,000 rise in over-65s, even as the number of people working dropped in several younger age groups.

It comes amid concern that more pensioners are being forced back to work by to the cost of living crisis and the prospect of a painful winter of higher bills.

There are growing signs businesses are struggling with the fallout of the pandemic and the jump in inflation already.

Official figures show 1,827 company insolvencies were registered in July, up two-thirds compared with the same month of 2021 after Covid protections for struggling businesses came to an end.

Christina Fitzgerald, president of restructuring trade group R3, said the rise in creditors’ voluntary liquidations indicates “a growing number of company directors are choosing to close their businesses, perhaps because they believe that the current economic conditions make survival impossible.”