Prospect of real pay growth finally in sight after inflation falls again

Economics Editor

After six years of real-terms declines, wages are finally set to outstrip inflation, official figures are expected to confirm this morning.

The Office for National Statistics (ONS) reported yesterday that annual consumer-price inflation fell to 1.6 per cent in March, down from 1.7 per cent in February and the lowest rate of price increases recorded since October 2009.

Today the ONS is due to report annual earnings for February. In January total pay rose at an annual rate of 1.7 per cent to £479 a week.

If that rate of growth is maintained, it will equal the inflation rate for February. And if pay growth rises above 1.7 per cent for the month, real wages, on this measure, will have finally increased in real terms.

The consensus of City economists is that the growth rate for the three months to February will be 1.8 per cent.

"The gap between earnings growth and inflation looks set to become increasingly positive over the coming months, albeit relatively gradually, which is supportive to growth prospects," said Howard Archer of IHS Global Insight.

However, the general secretary of the TUC, Frances O'Grady, pointed out that workers are still around £40 a week worse off than they were before the financial crisis in 2008, and she warned against over-reliance on the Consumer Prices Index (CPI) to measure the cost of living.

"Those waiting to hail the first month in which wages creep higher than prices as recovery will show how out of touch they are with the lives of ordinary people, especially on a measure of prices that does not include housing costs," she said.

Matthew Whittaker of the Resolution Foundation think tank also highlighted the shortcomings of the CPI and pointed out that the ONS figures published today will not cover the self-employed, who now make up around 15 per cent of the workforce.

"There is the suspicion that the recent surge in self-employment reflects a shift towards low-paid odd-jobbing rather than genuine entrepreneurial zeal," he said.

The ONS said the largest contributor to the fall in the annual CPI rate in March was transport, particularly motor fuels. Further downward pressure came from clothing, furniture and household goods. Pushing in the other direction were restaurants, hotels, alcohol and tobacco.

In March, the Office for Budget Responsibility forecast that aggregate wages will rise by 2.5 per cent this year, while prices will go up by just 1.9 per cent.

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