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Living standards keep tumbling despite high employment

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It’s becoming a familiar story. Official numbers show employment at record levels and low unemployment, yet there are no signs of the end of the living standards crisis.

Workers have experienced real wages falling for the sixth month in a row, as price rises outstrip wage growth and bite deep in to our living standards.  Most working people are earning less today (in real-terms) than a decade ago.

Rising inflation is driving the cost of living crisis. But the impact of government policy – freezing public sector pay and working age benefits – means that inflation is hitting some groups particularly hard.

Nominal regular pay growth in August (the latest data) is 2.1%, and this is well below the 4% pre-recession norm. Inflation (CPIH) growth for the same period is 2.7%.

Nominal regular pay v CPIH inflation over the year   

The chart below shows the growth in real wages seen in 2015 and 2016 was very short-lived. It was only achieved due to exceptionally low inflation rates.  

Real earnings (percentage year-on-year) three-month average (2008-2017)

The current living standards squeeze is caused by the combination of weak nominal wage growth and increasing inflation. After the vote to leave the EU, the reduction in the value of the pound led to more expensive imports.

This has contributed to inflation (CPIH) rising to 2.8% in September. A year ago, it was 1.3%.

In the September inflation data, looking at the breakdown it was food prices, transport costs and recreational goods that increased inflation.

Inflation over the year CPI and CPIH

CPI and CPIH inflation are now at their highest levels in over five years. And the Bank of England Governor says inflation will continue to rise before it peaks, he expects this to peak in October or November.

CPI and CPIH inflation since 2012

Those working in the public sector are being hit even harder. Over the last few years, pay growth in the public sector has fallen short of that in the private sector thanks to an initial pay freeze and subsequent pay cap of one per cent.

The government recently announced that it would lift the pay cap for police and prison officers, while keeping it in place for the rest of the public sector.

However, the offer remains well below inflation so this group of workers will still be experiencing a real-terms pay cut. 

By the end of this parliament, prison officers will be earning £980 less in real terms than they are today. Police officers, who are getting a two per cent increase, will be £450 a year down.

The devastating impact of stagnant wages for all workers was highlighted by a recent TUC poll. One in eight workers (13%) are skipping meals to make ends meet, and close to half of working adults are worried about meeting basic household expenses, such as food, transport and energy.

It is no surprise then we are seeing rising levels of personal debt. The FCA’s Financial Lives survey paints an alarming picture of growing debt and credit problems across the UK, showing that just under 8 million are over-indebted.

And it’s not just pay being squeezed; it’s also government support for in- and out-of-work benefits. The government’s traditional position was to update benefits in April with the inflation rate from the previous September.

However, the uprating of most working age benefits was limited to one per cent in 2013/2014, 2014/15 and 2014/16, following an announcement by the then-Chancellor George Osborne in Budget 2013.

And now most working-age benefits are subject to an uprating freeze over the four-year period 2016/17 to 2019/20. This means that they will remain the same cash amount as they were in 2015/16.

CPI inflation announced on Tuesday is three per cent for September; this in effect means there is a 3% real cut in these benefits just for this year.

IFS analysis shows (taking in to account the September rate of inflation) that by the end of the four-year benefits freeze in 2019–20, it will have reduced benefit entitlements by £4.6 billion per year, resulting in entitlements being on average £450 lower than they would otherwise have been for around 10.5 million households.

They also show how these losses are spread across the income distribution; the largest impact is toward the bottom of the distribution, where households are more dependent upon benefits for their income.

People’s living standards have taken a really big hit, and artificial pay caps and benefit cuts are further exacerbating the gap between living costs and incomes.

The Budget is on 22nd of November, if the Government really understands the pain of household finances then let’s see some genuine action. For a start, it could scrap the pay cap imposed on public sector workers, and unfreeze working age benefits.

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