Workers’ salaries are devaluing thanks to inflation and slow wage growth, with construction workers hardest hit, according to Office for National Statistics (ONS) data.
Inflation hit a four-year high in May – the latest figures available – taking the Consumer Prices Index (CPI) to 2.9%. It has surged in 2017 due in part to the devaluation of the pound after the EU referendum last year. The pound has lost more than 14% of its value since 23 June 2016.
But there are concerns inflation could rise further still. The Schroders Economic Group forecasts that inflation will peak above 3% this summer before settling down to around 2% – the government’s inflation target – in 2018.
The graph below illustrates Schroders’ inflation forecast.
Source: Schroders Economic Group, 30 June 2017
‘Higher inflation has reduced disposable income’
But cause for concern is the impact high inflation has on salaries, especially as wage growth has fallen since the beginning of the year, growing on average at just over 2%.
Azad Zangana, senior European economist and strategist at Schroders, comments: “The sharp rise in inflation has coincided with a slowdown in economic growth along with wage growth.
“While jobs are still being created for now, higher inflation has reduced the disposable income of households, and therefore has contributed to the slowdown in spending.”
According to data from the ONS, the worst affected are those in the construction industry, where wages are rising at just 1% on average.
Those working in finance and business services, manufacturing, and wholesale, retail, hotels, and restaurants have also all seen earnings growth of less than inflation. See the graph below.
Source: ONS EARN01 figures, 12 July 2017: Average annual earnings growth by industry sector.
How your wage is affected
The ONS has provided us with a handy tool (below) to calculate what increase you would need in your pay packet next year, to avoid devaluing your take-home pay.
For example, the average median wage was £28,200 between 2015 and 2016, according to the ONS. Based on calculations from the tool, if that pay packet rose at the average growth rate of 1.8%, it would devalue £254 against current inflation.
See the tool below and enter your annual salary to calculate how much your earnings could devalue. (The tool is based on June 2017 CPIH figures released on 18 July 2017 and May 2017 growth in earnings figures released on 12 July 2017. See What is CPIH? for an explanation of how it differs from CPI.)