Pay finally outpacing inflation? Read the small print…

by Jackie_South on April 17, 2014

Empty-pocketsThere has been lots of rightwing gloating about the Office for National Statistics (ONS) report yesterday that wage increases in March have exceeded inflation for the first time since 2008. The annnualised pay increase was 1.7%, compared to inflation (using the consumer price index) of 1.6%.

That’s it! Recession over!

Not quite. That annualised 0.1% difference in March, if sustained, would take 77 years to catch up with the 7.7% decline in real wages since 2007. Even with this increase, real wages are now over 6% behind what they were when Cameron moved to 10 Downing Street.

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But let us have a closer look at what the figures actually were. First, that 1.7% increase in pay includes bonuses. Regular pay without bonuses only rose by 1.4%: so if a job doesn’t shell out a bonus then its pay is still, on average, falling behind inflation.

It is worse in the public sector. Private sector pay has risen by 2%, public sector wages by only 0.9%. Now, you could argue that because pay restraint hit the private sector hardest first in 2008 this is fair enough. But that still shows that for the public sector there has been a 0.7% fall in living standards over the last year.

All of the above is based on inflation calculated at the Consumer Price Index (CPI). Now, economists tend to agree that CPI is the best measure of real inflation in the economy, as it excludes some distorting factors, principally house prices where there is an investment return to the purchaser.

But, of course, house prices are a very real cost of living issue. If you really want to track how pay is tracking the cost of living for individuals, you need to use the old Retail Price Index, which includes housing costs. This currently stands at 2.5%. So, even using the 1.7% pay increase figure, there has been a drop of 0.8% in living standards.

So, if you are in a private sector firm that pays bonuses and you own your own home with no intention of moving, good for you – your standard of living has increased by 0.4% over the last year. Don’t spend it all at once.

But if you are a public sector employee paying rent or trying to buy a new home, your real pay has fallen by another 1.6% over the last year.

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