Workers feel the squeeze, hit by lower wages and inflation
Average wages dipped at the end of last year leaving British workers suffering a slowdown in spending power as inflation picks up, official figures showed today.
UK wage growth is still outpacing inflation but analysts say the gap is closing fast. Labour market numbers from the ONS revealed wage growth unexpectedly dipped to 2.6 per cent in the three months to December.
While yesterday inflation hit 1.8 per cent in January and could spiral to 3 per cent before the end of the year. According to economists workers now face the real prospect of earning less while having to pay more for everyday goods.
Squeezed: Limited growth in wages and rising inflation could spell the end of consumer spending as workers become poorer
Ben Brettell, senior economist at Hargreaves Lansdown, said: 'Following yesterday's news that CPI inflation jumped to 1.8 per cent, today's labour market numbers from the ONS revealed wage growth unexpectedly dipped to 2.6 per cent in the three months to December, from 2.8 per cent a month earlier.
'This means real wage growth continues for now, but with inflation forecast to hit 2.8 per cent early next year, a deceleration in pay growth could see real wages fall at some stage. This would squeeze household budgets as we move through the year.'
The worry is that persistently higher inflation and lower wages will result in consumer spending being dampened.
Consumer spending has been the cornerstone of the UK economy.
Howard Archer, analyst at IHS Markit, said: 'Consumers' purchasing power is now being markedly diluted - while earnings growth improved modestly overall in the latter months of 2016, consumer price inflation has been picking up faster.
'December's relapse in earnings growth magnifies this dilution of purchasing power.
Average weekly earnings grew by 2.6 per cent in the year to December
He added: 'Not only is consumer's purchasing power now being markedly diluted - but it looks highly likely to worsen markedly further over the coming months. Indeed, it looks probable that inflation will move above earnings growth during 2017.'
Suren Thiru, head of economics at the British Chambers of Commerce, said: 'With pay growth slowing slightly, the differential between price increases and wage growth continues to close.
'If this trend persists earnings in real terms could be squeezed, stifling consumer spending, which is an important determinant of UK growth.'
Other stats released by the ONS showed the unemployment rate in the three months to December remained at an 11-year low of 4.8 per cent.
UK unemployment fell by 7,000 to 1.6 million people, it said.
Meanwhile the claimant count, showed the number of people claiming out-of-work benefits fell by 42,400 in January, against expectations of a small rise.
The pound is down 0.4 per cent against the dollar at $1.2428 Source: Bloomberg
Other ONS figures indicated that the number of non-UK nationals working in the UK increased by 233,000 to 3.48 million compared with the same period a year ago.
Brettell added: 'The UK labour market continues to confound the doom-mongers with its resilience to the Brexit shock.
'The employment rate edged higher to 74.6 per cent, which was a record high.'
ONS senior statistician David Freeman said: 'Continued moderate growth in employment has led to a new high in the total employment rate, while the rate for women has reached 70 per cent for the first time on record.
'Overall, the labour market appears to be edging towards full capacity.'
Sterling fell around a third of a cent as less 'tightness' in the labour market lessens the chance of an interest rate rise.
The pound is down 0.4 per cent against the dollar at $1.2428.