UK households facing biggest earnings squeeze since 2014

The combination of a sterling-induced inflation surge and lacklustre wage growth is eating into the spending power of consumers.
The combination of a sterling-induced inflation surge and lacklustre wage growth is eating into the spending power of consumers. PHOTO: BLOOMBERG

LONDON (BLOOMBERG) - UK living standards are under more pressure than at any time in 2 1/2 years and the squeeze is getting tighter.

Adjusted for inflation, regular pay rose just 0.1 per cent in the three months through February, the weakest figure since the third quarter of 2014, the Office for National Statistics said Wednesday. Nominal earnings slowed to growth of 2.2 per cent, a seven-month low.

The combination of a sterling-induced inflation surge and lacklustre wage growth is eating into the spending power of consumers, the engine of the British economy. Retail sales fell the most in six years in the first quarter, an industry survey showed this week.

With the Bank of England predicting inflation will hit close to 3 per cent by the end of the year, real earnings are about to turn negative for most workers. In February, they fell 0.4 per cent, the first single-month decline since August 2014.

Earnings are slowing despite unemployment being close to historic lows. In the latest three months, the jobless rate remained at 4.7 per cent, the lowest since 2005, and the number of people in work rose by 39,000 to a near-record 31.8 million. Vacancies in the first quarter rose to the highest ever.

For one Bank of England policy maker, sluggish wage growth suggests there is slack in the labor market that could weigh on pay settlements for years, meaning there is no urgent need to raise interest rates.

"Involuntary part-time and self-employed workers, the threat of future job losses due to automation, demographic changes, all work in the direction of leading to less upward wage pressure for a given level of unemployment," Gertjan Vlieghe said in a speech last week.

The BOE says the jobless rate can fall as low as 4.5 per cent without fueling inflation. While Mr Vlieghe says that estimate is subject to uncertainty, it may not be tested anytime soon.

Economists see unemployment reaching 5.1 per cent by early next year as Brexit negotiations take their toll on spending and investment. The slowdown may already be happening, with the increase in employment in the latest period falling well short of forecasts. nnnn