Wages rising faster than inflation is good news, but after 17 years in the UK’s doldrums it must be sustained

Britain is getting a decent pay rise as wages are rising faster than inflation.

You have to blur the numbers a bit to make this claim, as this week’s average wages and inflation data cover slightly different time periods, but the crucial thing is that the first figure was higher than the last.

The ONS revealed that between April and June, average regular wages rose 7.8 percent annually, while annual consumer price index inflation was 6.8 percent in July.

That’s a real 1 percent pay raise, so crack open the champagne (maybe cremant instead).

Of course, many people will not get a raise of this magnitude and will still lose money in real terms. But since the ONS data uses an average average – the figure in the middle when you put them all in a row – the wage figure is a fair representation of what’s going on.

Wage growth was also claimed as an all-time high – though again that’s only because these particular records didn’t start until 2001.

Our business editor, Mike Sheen, explains more about what the wage growth numbers mean for you and the economy here.

While wages remain high, the UK’s annoyingly stubborn inflation is finally coming down.

The CPI figure of 6.8 percent for July was almost a whole percentage point lower than the 7.9 percent figure for June.

That drop was largely due to the reduction of the energy price cap to £2,074, significantly lower than the previous energy price guarantee of £2,500.

A fall in food inflation also helped, although it is still sky-high: 14.9 percent instead of 17.4 percent in June.

Put this together and what do you get? Angharad Carrick goes into detail on this with a look at what falling inflation means and where it could end in 2023.

In short, inflation was more or less in line with expectations, so there was no nasty headline surprise.

Core inflation remains tricky — stalling at 6.9 percent — but isn’t driving markets as crazy as it did in June, when it came in at 7.1 percent in May.

So while inflation numbers are unlikely to hold back the Bank of England from another rate hike in September, they haven’t pushed interest rate expectations up massively either.

Markets had expected a peak of around 5.75 percent, now they are forecasting a base interest rate peak closer to 6 percent.

However, exact predictions about the base frequency peak should be taken with a very large grain of salt as they shift frequently and rapidly.

The stumbling block for the economy and our personal finances thrown up by this week’s data has less to do with the spike than with the view that interest rates may need to stay high longer. This will be good news for savers looking for good rates, but bad news for homeowners with mortgages facing payment shocks.

Restraint: Bank of England boss Andrew Bailey does not want big pay rises

What economists were concerned about was the pace of wage increases.

The Bank of England boss and the Chancellor have already made their views on wages clear: they really don’t want us asking for more money, or our employers giving it to us.

This is not because Andrew Bailey, with £500,000 a year, and multimillionaire Jeremy Hunt decided to troll us.

Instead, it’s because they fear we’re going into a wage-price spiral: where you end up in a vicious circle of companies raising prices to cover the cost of paying higher salaries and workers demanding even higher salaries to pay those prices .

This can cause inflation to become further entrenched in an economy and is a tenet of economics textbooks.

Still, one of the most important things I learned while studying economics was that theory often doesn’t translate into reality.

Life is more complicated than textbooks and I’m not so sure we should worry about higher wages in Britain today.

Instead, we should recognize that while the overall numbers are high, they reflect an exceptional inflationary moment when people need more money to pay essential bills, and that the UK could use some above-inflation wage growth.

Doldrums: Average earnings adjusted for inflation are no higher than they were 17 years ago in 2006, according to ONS figures based on CPI and average wages. They have since spent only a short portion of the period above their pre-financial crisis levels

If you start poking around the ONS website, you will find data on real average weekly wages and discover that this is not a pretty long-term picture.

The data is indexed against inflation to 2015 and shows the current UK real average weekly income figure as £469.

Scroll back and you’ll see this is the same as in May 2019, meaning today’s workers are no better off on average than they were four years ago.

But you can go on, and you’ll also find that they’re no better off than they were in December 2010, when the figure was also £469.

And to make matters worse, they are also only at the same inflation-adjusted income level as in March 2006.

Against that background, you don’t need to worry too much about wage increases momentarily above inflation – it’s one where you want to make a plan to get them back to being in that position regularly, as they were before the financial crisis.

This brings us back into the realm of the productivity puzzle that has seen the UK fall behind its peers since the financial crisis. That’s a big topic that would require a whole other column instead of covering it here.

What is clear is that Britain needs a sustained wage increase, which means we need to stop standing still and get richer again.