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What do the latest UK inflation data mean for real wages?

UK inflation is surging, with the rise in the energy price cap a key factor driving the escalating cost of living crisis. New data show that wages are failing to keep up, particularly in the public sector. The situation is worsened by sharp increases in food and transport costs.

Inflation in the UK is at a 40-year high, according to the latest data from the Office for National Statistics (ONS). These estimates, released yesterday (18 May 2022), are the first to account for the revision to the cap on what energy suppliers can charge approximately 15 million households across the country.

Alongside the price cap revision, supply shortages of natural gas – triggered by Russia’s invasion of Ukraine and the associated sanctions against the Kremlin – are contributing to the surging costs of gas and electricity.

Further, even as oil prices have fallen from their peak in March, the cost of motor fuel has hit a record high. The governor of the Bank of England, Andrew Bailey, has also warned of significant food price increases that are a ‘major, major worry’.

As inflation continues to rise, people in the UK are facing tough choices in the supermarket aisles and at the petrol pumps.

How high is inflation?

When estimating inflation, the ONS uses two main metrics: the consumer price index (CPI) and the consumer price index including owner occupiers’ housing costs (CPIH). CPI tracks the prices of a typical basket of goods over time, and CPIH is a similar index, which also accounts for the costs of owning, maintaining and living in a home.

Figure 1 shows that CPI rose by 9% over the 12 months to April 2022. This is the highest recorded rate in the historical series published by the ONS (which dates back to January 1989). Against historical ONS data for CPI, April’s figure is the highest since 1982.

Figure 1: Year-on-year growth in prices by index (CPI, CPIH and owner occupiers’ housing costs, OOH)

Source: ONS

CPIH has also increased, growing by 7.8% over the 12 months to April 2022. This is the highest it has been since April 1991, when it stood at 8%.

The main difference between the two rates stems from the inclusion of owner occupiers’ housing costs (shown by the OOH series in Figure 1), which accounts for around 17% of CPIH.

What is driving inflation and how is it affecting households?

Costs associated with electricity, gas and other fuels contribute 1.86 percentage points to the latest CPIH inflation rate – the largest contribution from any division. This follows Ofgem (the Office for Gas and Electricity Markets) revising the price cap on energy bills upwards by 54% at the start of April 2022. Households have seen their energy costs rise by an average of £700 per year, which means that homes using a typical amount of gas and electricity are now set to pay approximately £1,971 per year.

The greater the proportion of income spent on energy, the greater the challenge. Indeed, research from the Institute for Fiscal Studies (IFS) shows that poorer households are already facing double-digit inflation and have been since April. As these households spend more of their total budget on gas and electricity, inflation is hitting this group harder.

The IFS analysis shows that in April 2022, the bottom tenth of the UK population in terms of income faced an inflation rate of 10.9%. This was three percentage points higher than the rate facing the richest tenth. Crucially, most of this difference was driven by the fact that the poorest households spend 11% of their budget on utility bills, compared with 4% for the richest.

Transport costs are also a major contributor (at 1.47 percentage points). This is due to large changes in the price of motor fuels. For example, average petrol prices were 161.8 pence per litre in April 2022, compared with 125.5 pence per litre a year earlier.

Food prices are also rising steadily and contributed 0.09 percentage points to the increase in CPIH, going up by 1.5% over the year to April. Like transport and energy, food and drink are difficult to cut down on, and lower-income families, already unable to buy premium products, have fewer options in terms of switching to buying budget ranges.

Without support, rising food and energy prices could leave lower-income families struggling to access even the most basic necessities, as they are forced to choose between ‘heating and eating’. There is evidence that some households are being driven to using food banks, with recent data from the Trussell Trust showing that 2.1 million food parcels were delivered by the charity between 1 April 2021 and 31 March 2022 – a 14% increase compared with pre-pandemic levels.

What does this mean for wages?

Like prices, wages are also growing, but not fast enough to keep pace with the ballooning cost of living. Between January and March 2022, average total pay (which includes bonuses) grew by 7%, while average pay (excluding bonuses) went up by 4.2%, according to the most recent UK labour market data from the ONS.

Strong bonuses, particularly in financial services and the construction industry, are contributing significantly to pay growth. Bonuses are typically higher in the private sector than the public sector, and this is apparent in Figure 2, where the total pay growth in the public sector (1.6%) is weak in contrast with the private sector (8.2%).

Figure 2: Weekly earnings growth by sector (total versus regular)

Source: ONS

As a result, inflation is having unequal effects on people depending on their jobs. Those working in the public sector are likely to see their wages grow less (or even shrink) in real terms over the coming months. Comparably, private sector employees, and particularly those in industries offering high bonuses, are likely to be less negatively affected by surging inflation.

One driver of this effect may be that people are moving jobs and bargaining for better pay. Indeed, there is some evidence that workers are looking to move jobs – and we’ve seen a rise in employers offering joining bonuses to attract new staff – and bargaining for higher wages to boost their income in the face of rising living costs.

What next?

Worries about rising inflation have been a concern for some time. The initial re-opening of the economy after the Covid-19 pandemic, and significant supply chain disruptions, led to concerns about rising prices as businesses struggled to keep up with increased consumer demand. At the same time, energy prices rose as the world economy recovered from the pandemic and energy demand returned.

Now, with Russia’s invasion of Ukraine disrupting both energy markets and the supply of agricultural produce such as wheat, sunflower oil and fertiliser, together with supply shortages caused by local lockdowns in China, prices are set to continue to rise over the coming months. In the absence of larger increases in take-home wages, this will mean that household budgets will continue to face significant challenges.

Where can I find out more?

  • The latest UK inflation data are available here.
  • The latest UK labour market data, including wages, are available here.
  • This report by the Institute for Fiscal Studies provides detail on the distributional effects of inflation in the UK.
  • This article by Gill Plimmer and Harry Dempsey in the Financial Times suggests a surplus on liquified natural gas (LNG) could ease pressure of UK energy bills.

Who are experts on this question?

  • Jagjit Chadha
  • Richard Davies
  • Huw Dixon
  • Stuart McIntyre
  • Michael McMahon
  • Jonathan Wadsworth
Authors: Elias Wilson, Charlie Meyrick
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