Real pay is falling but further interest rate rises look more likely

ITV News Business and Economics Editor Joel Hills explains how households will be affected by pay not keeping up with prices and incomes being squeezed

This morning, the chancellor, Rishi Sunak, was celebrating the fact there is a record number of people on company payrolls and that redundancies are at an all time low.

“The jobs market,” he declared, “is now healthier than most could have hoped for”. 

He is absolutely right. Firms have continued recruiting with gusto despite the end the furlough scheme and the emergence of the Omicron variant at the end of last year.

The painful string in the tail, which the chancellor also acknowledged this morning, is that inflation is high and rising.

Money is buying less, living standards have begun to slip.

The expectation is that this period of falling “real” pay will prove temporary but, of course, in the meantime it is causing either inconvenience or hardship depending on a household’s financial circumstances.

There’s another implication here too. While average weekly pay isn’t rising as fast as prices, pay is rising and in a way that makes in more likely that the Bank of England will continue to raise interest rates.There is an abundance of vacancies in the economy, the size of the workforce has shrunk, the balance of power has swung in favour of the employee.

The Bank’s worry is that a round of inflation-busting pay rises, of the sort some unions are demanding, would be financed by another round of price increases, leaving everyone worse off.

This is what Andrew Bailey meant when he urged pay-restraint two weeks ago.

Of course, it’s his job to do all he can to peg-back inflation, which currently looks rampant. A union’s job is to advocate on behalf of the workers they represent.

“Pay packets are plummeting in value as bills and prices sky-rocket,” argues Francis O’Grady, general secretary of the Trade Unions Congress.

“This huge pressure on household budgets will only get worse unless the government takes proper action.”

The chancellor has already taken significant steps to protect those on lower incomes but the wave of high inflation is still breaking and they remain extremely exposed. He’s under pressure to do more.

Last week, when I asked Rishi Sunak if public sector workers could expect a generous settlement this year, he was reluctant to answer.

The chancellor will, undoubtedly, be keen to set an example of pay restraint. He will also be mindful that doing so may trigger a wave of industrial action.

"Market rate expectations are skyrocketing," says Ross Walker, chief UK economist at NatWest.

"It is being driven partly by the more aggressive stance being signalled by American policy makers, partly by a view that UK inflation pressures will prove harder to rein in."

Bank Rate sits at 0.5%. Investors are now betting it will reach 2.25% in February 2023, up from 1.5% just two weeks ago.