(Bloomberg) -- British workers are about to enter another period of slow-rising living standards, after more than a year of bumper real wage growth that provided a welcome relief for their battered finances.
Regular pay growth, when adjusted for CPI inflation, was 2.6% in the three months to August, marking 13 months of wage increases outstripping price rises, Office for National Statistics figures released Tuesday show.
Yet the pace was the slowest since the first quarter, and Bank of England forecasts based on private-sector wages suggest the gap with inflation will narrow to just 0.8 percentage point next year. That is around the long-run average prior to the pandemic, but down sharply from its projection of 2.3 points this year.
“Britain’s brief era of healthy pay growth could soon end,” said Charlie McCurdy, an economist at the Resolution Foundation think tank.
The shift is happening at an awkward time for Prime Minister Keir Starmer, who has endured a difficult first 100 days in power and seen his approval ratings plummet. Though inflation has fallen back to near the BOE’s 2% target, British households are still feeling the impact of double-digit price increases triggered by the pandemic and Russia’s war in Ukraine.
There are further potential headwinds that could weigh on future pay rises, including a weakening jobs market and speculation — which the government has done little to quell — that Chancellor of the Exchequer Rachel Reeves is preparing to increase a business payroll tax in her budget on Oct. 30. Consumer sentiment has also slipped, amid the government’s warnings about the dire state of the UK’s public finances and the steps needed to repair them.
In better news for the government, Tuesday’s data showed the headline unemployment rate has fallen to 4%. But economists are concerned about the accuracy of the figures, and McCurdy instead pointed to signs of a loosening labor market in vacancies and payroll data as providing a clearer picture of the state of play in the economy.
The data “should serve as a further warning that future pay growth will need to be driven by rising productivity, rather than a hot jobs market,” he said.
The level of pay in real terms climbed above pre-financial crisis highs earlier this year. It’s still below the record peak during the pandemic — though that figure was heavily distorted by compositional effects caused by the shuttering of the economy.
--With assistance from Andrew Atkinson.
©2024 Bloomberg L.P.
