The squeeze: the beginning of the end or the end of the beginning?

The squeeze: the beginning of the end or the end of the beginning?

It’s official: wages have at last caught up with inflation. The squeeze is over. Or is it? As ever, when it comes to economic turning points, the numbers can differ significantly depending on how you cut them.

So let’s break them down ourselves.

The figures most people are focusing on today are those for CPI inflation and average earnings including bonuses. They show that in the three months to February, earnings were rising at an annual rate of 1.7%.

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Meanwhile, in the year to March, CPI inflation (itself also an annual figure) was 1.6%. There’s no doubting that this is a significant watershed: since 2010 wages have been rising at a significantly slower rate than inflation. This has happened occasionally in recent history, but only quite passingly. The recent squeeze has been the longest on recent record (probably comparable with the period when Britain returned to the Gold Standard in the 1920s).

50 years of real wages: earnings minus inflation (RPI up til 1988, CPI thereafter). ONS/me
50 years of real wages: earnings minus inflation (RPI up til 1988, CPI thereafter). ONS/me

However, as you’ll probably have noticed, those figures are for slightly different periods: if you’re comparing that 1.7% wage number with the February inflation number, the two are the same, 1.7%. Then again, the employment numbers are a three-month average: pick out the single month earnings figure and the number you get is 1.9% – well over the 1.7% CPI inflation number that month.

The pedantry need not end there: exclude bonuses and wages rose at a mere 1.3% in the year to Feb (1.4% if you choose the three-month average). Using RPI rather than CPI as your measure of inflation makes the gap wider still (though there are ongoing concerns over the way RPI is calculated).

All the same, ignore the quibbles and the broader picture is relatively clear: wages are finally catching up with inflation. But this isn’t necessarily a cause for wild celebration. For what’s really happened is that inflation has fallen sharply and earnings have stayed in more or less the same place. Wages are still rising far slower than they were before the crisis (when they tended to increase by about 4% a year).

In due course, earnings should rise so they are comfortably above inflation, according to the Office for Budget Responsibility.


The problem is that this does little to detract from the extraordinary amount of lost ground over the past few years. In real terms, in other words adjusting for inflation, wages are now around 8% lower than in 2008. According to the OBR’s own projections, even though wages will overtake inflation this year and will accelerate in the coming years, real wages won’t be back to their October 2008 level even at the end of its forecast horizon, at the end of 2018.


In other words, when it comes to real earnings, we are already more than halfway through a lost decade.

That in turn raises a very real question about when people will stop feeling the pinch. There is little doubt that there is something of a spring in the step of the UK economy right now. However, the chances are this owes far less to the recovery in real wages than to the fact that the housing market is booming again, and families are raiding their savings at a record rate.