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Pay squeeze is over: Wage rises outstrip prices for the first time in a year

Britain’s year-long pay squeeze is over as wages rose by 2.8pc, overtaking price rises for the first time since January 2017.
Inflation fell to 2.7pc in February, meaning families are becoming better off in real terms.
At the same time unemployment fell to a new low of 4.2pc as employment increased by another 55,000 in the three months to February.
“The labour market continues to be strong, and for the first time in almost a year, earnings have grown slightly after inflation has been taken into account,” said Matt Hughes at the Office for National Statistics.
“Employment rose again in the three months to February, to reach its highest ever rate since records began. The unemployment rate fell, too, and is at its lowest since 1975.”
This is a sharp turnaround from the pay squeeze of the past year - at its worst in May, consumer prices rose 2.9pc while earnings were up just 1.9pc, leaving family finances suffering.
The sharp rise in inflation was driven by the fall in the pound after the EU referendum.
But much of that impact has now fed through the economy, meaning inflation is on a slow downward path.
At the same time wages are improving very gradually, with low unemployment putting pressure on employers to increase pay for staff.
As a result economists expect this trend to strengthen, with real wages rising more quickly over the course of the year.
“Last year, earnings growth remained stubbornly low despite strong jobs growth, but it is now picking up quite quickly,” said John Hawksworth, chief economist at PwC.
“Real earnings growth has edged back into positive territory, although the level of real earnings still remains some way below its pre-crisis peak, so many workers may still not feel that they are all that much better off.”
Average weekly earnings growth of 2.8pc is unchanged on the three months to January and is below the 3pc economists expected, though regular pay growth - which excludes bonuses and so is seen as a measure of underlying earnings - accelerated from 2.6pc to 2.8pc.
Private sector wages climbed by 2.9pc on the year, its joint-highest level since late 2016.
Earnings growth in the public sector accelerated to 2.3pc, the most rapid pace of growth since October 2012.
Pay rose most quickly in the construction sector, which has complained of skills shortages, with average earnings up 3.5pc on the year.
Finance and business services were next with earnings up 3.4pc, followed by other services and manufacturing, where workers’ pay rose 2.8pc.
Workers in retail, leisure and wholesale jobs were less fortunate, however, with average weekly earnings growth slowing to 2pc.
The quality of work appears to be improving as the rise in employment was driven by an increase in the number of full-time employees, rather than part-time or self-employed.
More work is available, too. The ONS found 815,000 job vacancies in the three months to March.
This is down from a peak of 823,000 two months earlier, but as the jobs market has continued to strengthen, there are currently 1.7 unemployed people for every vacancy - the lowest number since records began in 2001.
“With more people in work than ever, and three quarters of a million unfilled jobs, the stage is set for further rises in earnings through this year,” said Ian Stewart, chief economist at Deloitte.
The stronger pay numbers mean the Bank of England is expected to raise interest rates from 0.5pc to 0.75pc in its Monetary Policy Committee meeting next month.
Pay squeeze is over: Wage rises outstrip prices for the first time in a year

Mark Carney is expected to hike interest rates at the Bank of England next month, and the rise in real wages is unlikely to put him off

Credit:
Cole Burston/Bloomberg
“We suspect even the hawks at the Bank will have been slightly taken aback by quite how rapidly pay accelerated towards the end of last year, and survey evidence increasingly points to a bumper year for pay settlements,” said James Smith at ING.
“This is a key reason why we expect a May rate hike from the Bank of England. But what happens thereafter is less clear. While the committee has indicated they’d be comfortable with raising rates for a second time this year, Brexit talks still have the potential to get noisy in the autumn. Coupled with ongoing economic fragility, this could complicate efforts to hike again later in 2018.”
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