UK pay growth outpaces inflation for first time in a year

British workers have seen their first real pay rise in a year, as average wage growth overcomes the fading inflationary effects of the Brexit vote.

Bringing to an end 12 months of falling living standards, the latest snapshot of Britain’s job market from the Office for National Statistics showed pay rising above inflation for the first time since January 2017.

In the three months to February, average weekly earnings excluding bonuses increased by 2.8% from the same period a year ago. While that was unchanged from January – and missed economists’ forecasts for growth of 3% – the ONS said it was still enough to hand workers a real pay rise.

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Inflation has been falling in recent months, with the consumer price index dipping to 2.7% in February, as the impact of the fall in the value of the pound straight after the EU referendum begins to fade. At one point on Tuesday, the value of sterling hit a post-vote high against the dollar of $1.4376, before falling back.

Despite the better news, some economists said it was too early to declare the return of real wage growth because there were two ways to measure average wage growth versus inflation.

The ONS says real pay grew by 0.2% in the three months to February, set against its preferred measure for inflation, which includes housing costs. Typically lower than the consumer price index (CPI), the rate known as CPIH was 2.6% in the three months to February.

Average earnings growth has outstripped inflation for the first time in a year

% change on a year earlier

Wages

CPI inflation

-1

0

1

2

3

2014

2015

2016

2017

2018

Guardian Graphic | Source: ONS. Wages exclude bonuses

Officials at the Treasury do not measure pay growth in the same way. On their barometer, using the average rate of CPI over the three months of 2.9%, real wage growth has yet to return.

The unemployment rate unexpectedly fell to its lowest level since 1975 in the three months to February, putting borrowers on notice for the Bank of England to raise interest rates from as early as next month.

The number of people in work also reached a record high of 32.2 million as 55,000 more people started a job, giving an employment rate of 75.4%. The number of job vacancies remained close to the record high reached in December, hovering at 815,000, amid fears of labour shortages triggered by Brexit.

UK unemployment has fallen to 4.2% for the first time since 1975

Standfirst …

Unemployment

0

2

4

6

8

10

%

1975

1985

1995

2005

2015

Guardian Graphic | Source: ONS. Aged 16 and over, seasonally adjusted

The work and pensions secretary, Esther McVey, said: “Day by day we are helping people turn their lives round by getting into employment. Jobs are key to transforming lives and work is the best route out of poverty.”

The boost for the economy comes after freezing weather from the “beast from the east” forced diggers to fall idle and shoppers to stay home. Economists expect further rises in earnings during the year, but they say Britain still needs to make up a lot of ground after a decade of poor performance.

According to the Resolution Foundation, average annual earnings are still almost £800 a year lower than they were 10 years ago, while the gains have been unequal across different sectors of the economy. Real pay has been rising by almost 2.8% for those in finance for the past year and 1.5% for those in construction, but there has been a continued squeeze in the public sector.

The TUC said workers’ pay packets are forecast to remain below their pre-crisis levels until the middle of the next decade.

Its general secretary, Frances O’Grady, said: “The government must get the economy working again for working people. Ministers need to increase the minimum wage to £10 an hour, fund a proper pay rise for all public servants, and give workers stronger rights to negotiate fair pay deals.”

According to government estimates uncovered by Labour, average real earnings will be £1,733 lower in 2021 than they were forecast to be in November 2016.

The shadow chancellor, John McDonnell, said: “These figures are truly damning, and show that it is working people who are picking up the tab for Tories’ economic failure.”