British living standards declined at the fastest pace in almost eight years in December, as average wages rose less than the rise in consumer prices, despite unemployment holding at 4.1 per cent and vacancies hitting a fresh record high.
While the average wage excluding bonuses rose 3.6 per cent on the year in the three-month period ending in December, this was well below the 5.4 per cent inflation rate recorded in the final month of last year, according to the Office for National Statistics.
This means that wages were down 1.2 per cent after being adjusted for inflation, the biggest decline since 2014, as households face the biggest decline in their disposable income for at least 30 years, according to the Bank of England, amid rising energy bills, taxation and interest rates.
“The squeeze on firms’ finances from high inflation, soaring energy bills and the looming national insurance hike is likely to weaken job creation and further restrain pay growth in the coming months,” said Suren Thiru, head of economics at the British Chambers of Commerce.
“With high economic inactivity indicating that many people have left the jobs market altogether, chronic staff shortages are likely to weigh on the UK economy for a sustained period.”
Despite the cost-of-living squeeze, the labour market remained buoyant with employers adding jobs for a 14th month in a row in January, leading to another rise in pay-rolled employees to a record 29.5 million.
“The number of employees on payrolls rose again in January 2022 and is now well above pre-pandemic levels,” said Sam Beckett, head of economic statistics at the ONS.
While the UK employment rate increased by 0.1 percentage point on the quarter to 75.5 per cent, the number of people deemed economically inactive also increased slightly.
“The number of people in employment overall is well below where it was before Covid-19 hit,” said Mr Beckett.
“This is because there are now far fewer self-employed people.”
Meanwhile, the number of unfilled vacancies hit another record high of 1.298 million in the three months through January, while job-to-job moves also reached a record high, driven by an increase in resignations and companies desperately trying to fill positions.
Staff shortages are only made worse by the pickup in economic inactivity, which in turn is driving up salaries, with workers not seeing the benefit as they are being swallowed up by rapidly increasing prices. Inflation is expected to peak at 7.25 per cent in April.
“The good news is that the UK economy is continuing to create jobs. The bad news is that businesses are struggling to hire and pay is failing to keep up with inflation,” said Matthew Percival, CBI Director for People and Skills,
The cost-of-living crisis is already affecting Britons who are grappling with higher energy bills caused by surging wholesale gas prices and rising mortgage rates after the Bank of England increased interest rates to 0.5 per cent earlier this month.
Analysts expect the BoE to increase its benchmark rate further over the course of the year to 2 per cent by the end of 2022.
This will hit households hard, with the situation already set to worsen from April when the energy price cap — the maximum suppliers are allowed to charge in a year — goes up by £693, at the same time as a National Insurance increase of 1.25 per cent begins.
“Job vacancies hit yet another record high, indicating that the widespread labour shortages we have been seeing show no signs of easing any time soon. Firms will need to think carefully about how to get staff to stick around,” said Derrick Dunne, chief executive of YOU Asset Management.
“Set a need to offer higher pay and benefits alongside rising inflation and higher running costs, and many businesses could find themselves in a sticky spot this year. This would clearly not be good for the economy.”
While the labour markets seem to have shrugged off the end of the furlough scheme, the government will still need to offer support to struggling households going forward.
Chancellor of the Exchequer Rishi Sunak said the government’s £400 billion ($541bn) economic plan has protected the jobs market through the pandemic and is now healthier than most could have hoped for.
“Pay-rolled employee numbers are at a record high and redundancies are at an all-time low thanks to our plan for jobs,” Mr Sunak said.
“We're continuing to help more people into work and are providing support for the cost of living worth over £20 billion across this financial year and next.”
