From the TUC

Rising inflation is contributing to falling wages, and the pay squeeze isn’t set to get better

13 Jun 2017, by in Economics

Inflation is the highest it’s been since June 2013.

CPI inflation rose to 2.9% in May, from 2.7% in April. Only a year ago, CPI inflation was as low as 0.3%.

According to the Office of National Statistics (ONS), the main contributor to the latest high inflation figure was rising prices for recreational and cultural goods and services – such as games, toys and hobbies. As the old saying goes, it’s all fun and games until CPI inflation rises to 2.9%.

This latest figure means that inflation has already risen above the peak forecast by the Bank of England. Its most recent inflation report expected CPI to hit 2.8% at the end of this year, before beginning to fall.

Inflation graph

Source: ONS

Inflation is contributing to a fall in real wages

A consequence of high inflation is the impact on real wages. In 2016, average real weekly pay (that’s pay once inflation has been taken into account) for UK workers was around £24 less than it was back in 2008. This adds up to over £1,200 a year.

This isn’t set to get better. The OECD has forecasted that UK real wages will fall by 1.1% in 2018. This is the joint worst across the OECD countries, and makes the UK one of only four countries that will see a fall in real wages.

You can’t just blame inflation for the fall in real wages though. Nominal wage growth has begun to slow. Annual growth in regular pay in the first quarter of 2017 was 2.1 per cent, the lowest quarterly figure since 2015.

The UK needs a pay rise

Increasing real pay must be a key priority for the new government.

An easy start for the government would be to scrap the artificial pay restrictions in the public sector. A 1% cap on public sector pay rises, when inflation is as high as 2.9%, is a harsh cut in real pay.

It’s unfair that those working in vital public services are receiving less and less money for their hard work.

However, this would only help those working in the public sector. To address the rising inflation and slowing wage growth that is affecting all workers’ real pay, the minimum wage needs a boost. At the TUC, we believe it should reach £10 an hour as soon as possible.

If we don’t deal with declining real wages now, we could be dealing with a living standards crisis in the very near future.