Analysts are warning that inflation and tax rises mean wages could go one of two ways – but that neither outcome is pretty. What will the rest of this year and next year bring for workers, consumers and businesses? 

 

New labour market figures from the Office for National Statistics show there was a record high of 1,288,000 vacancies last month, and the unemployment rate was 3.8%, down 0.2 points from the previous quarter. 

Pay including bonuses was up 5.4% in the year to December-February, while regular pay was up 4%. However, given the current rate of inflation, in real terms total pay was up just 0.4% and regular pay fell behind inflation by 1%. 

Wage growth was however divided between public and private sector; while public sector worker saw total pay rise just 1.9%, private sector workers had a raise of 6.2%. 

 

Sarah Coles, senior personal finance analyst at investment platform Hargreaves Lansdown pointed out that bonuses are a key reason for the big differences between public and private sector. 

 

“The bonus-heavy finance and business services sector saw pay soar 9.8% - way ahead of rising prices, which makes managing the rising cost of living far easier for people who happen to work in these sectors,” she said. 

 

Those employed in the wholesale, retail, hotels and restaurants sector also saw a big rise, of 6.4%, but much of this is an artificial affect which can be attributed to the fact that of the 4.5m people on furlough a year earlier, many worked in these industries, explained Coles. 

 

She called the low pay growth in the public sector “effectively a serious pay cut for millions of people”, which risks workers moving for better paid jobs in other sectors. This, she said, “would be another blow for health and care services already stretched to capacity”. 

 

The worst is yet to come, she predicted, with an inflation peak thought to be reached in October. A key question will be whether wages will continue to increase, leading to a wage-price spiral – or fall further behind inflation, causing real damage to poorer households. 

 

“The fact that regular pay is falling after inflation raises the risk we will see this gap open up, as wages are left further and further behind. This would push hundreds of thousands of working people into poverty, and force millions to make incredibly difficult decisions in order to make ends meet,” she said. 

 

“The patterns aren’t entirely clear just yet, so we can’t be certain where the jobs market is heading. All we know is that it’s going to be a bumpy ride,” she added. 

 

Laith Khalaf, head of investment analysis at investment platform AJ Bell, called the labour market figures “the calm before the inflationary storm”. He pointed out that price increases are happening at the same time as national insurance is going up by 1.25% - and that there will be stealth tax rises from the frozen income tax threshold. 

 

"Real regular pay is already running 1% behind inflation, which means declining living standards for working people, and with inflation on the rise, that’s only going to get worse. Particularly when you consider that the freezing of income tax thresholds means less money from pay rises filtering through to consumer pockets,” he said. 

  

“It’s hard to know what to wish for on wages. On current trends the shortfall between wages and inflation means workers will be feeling the pinch. On the other hand, if wage growth were to rise significantly from here, that would indicate the inflationary spiral is lifting off, and we could be in for a more prolonged period of price rises. The silver bullet of course would be for inflation to fall away, but that doesn’t look like it’s going to start happening until next year at the earliest,” he predicted. 

 

While the labour market is approaching the crisis from a position of strength, businesses are struggling to hire, having to pay astronomical energy prices and are faced with a cash-strapped consumer. 

  

Although economic growth forecasts for this year have been downgraded, they remain relatively robust because activity is still recovering from the pandemic. “It’s 2023 which is causing real concern though, as the effects of inflation, tax increases and interest rate hikes conspire to put the brakes on economic growth,” said Khalaf. “Just how slow the economy goes, no one knows, but the risk of stagflation is clearly there, no matter how rosy things look in the labour market right now.” 

 

What do you expect to happen in the economy over the coming year?