UK’s real wage squeeze may be ending, but its rate rising cycle is likely to be extended

The strength of regular pay growth in recent months means that the UK’s 18-month real wage squeeze may well have ended, at least for now. But this welcome news for workers will concern the Bank of England who may want to raise interest rates higher and for longer in order to cool pay growth, the Resolution Foundation said today (Tuesday).

Regular pay (excluding bonuses) grew by 7.2 per cent in the three months to April – driven by rises in both private and public sector pay growth (now at 7.6 and 5.6 per cent respectively). Annual regular pay growth in April came in at 7.5 per cent – only marginally below the inflation rate of 7.8 per cent.

Real pay in the three months to April fell by 1.3 per cent on the year. However, the Foundation notes that with the inflation rate set to continue falling over the coming months, a return to annual real wage growth may have taken place as early as last month.

The labour market also continued and grow – with economic inactivity down and employment up. Two key milestones have been passed in recent months, with total employment levels (33.1 million) and total working hours (1.06 billion) both back above pre-pandemic levels. Tightness in the labour market was roughly stable on the month.

But while the UK jobs market is heading in the right direction, it still has plenty of ground to catch up. The UK remains one of the few OECD countries – alongside the US, Switzerland, Latvia, Lithuania, Costa Rica, Chile and Colombia – where its overall participation rate remains below pre-pandemic levels.

Relatedly, the number of people who are economic inactive due to ill-health has reached a record high of 2.55 million. Tackling this issue, as well as boosting employment for under-represented groups such mothers, will hold the key to further boosting the size of Britain’s workforce.

Hannah Slaughter, Senior Economist at the Resolution Foundation, said:

“Record pay growth across Britain means our 18-month run of falling real wages may have ended. But while this is welcome news for workers, it will worry the Bank, and by extension anyone looking to remortgage, as it adds to the case for raising interest rates for longer.

“The UK’s jobs market is also recovering – with employment and total hours worked finally back above pre-pandemic levels. But with the number of people too ill to work reaching a record high of 2.55 million, policy makers still face a huge task in helping more people back into employment.”