UK earnings growth outstrips inflation

British pay growth outstripped a dwindling inflation rate by the widest margin since before the financial crisis in December, several measures of earnings showed, giving many households a boost ahead of elections in May.

UK earnings growth outstrips inflation

The Office for National Statistics also said yesterday the unemployment rate unexpectedly fell to 5.7%, its lowest level in more than six years.

The pick-up in pay growth was bolstered by bonus payments. But it may help British prime minister David Cameron to convince voters the recovery in the economy is filtering down to them. Mr Cameron hailed the numbers as a key moment in Britain’s recovery from the financial crisis.

“Let’s not put it at risk with Ed Miliband and Labour,” Mr Cameron said in a tweet. The opposition Labour party, led by Mr Miliband, stuck to its position that Britain is in the grip of a cost-of-living crisis with wages still well below their level before the financial crisis when adjusted for inflation.

The Bank of England is also watching wage growth as it considers when to start raising interest rates from the record low of 0.5% where they have sat for nearly six years.

Yesterday, minutes of the latest BoE policy meeting showed rate-setters thought wages were rising faster than they had expected but they still voted unanimously to keep policy on hold. Last week the BoE predicted wage growth would speed up sharply in 2015 and reach 3.5%.

The ONS said total pay, including bonuses, rose by a faster-than-expected 2.1% in the three months to December, speeding up from 1.8% between September and November. That was the biggest outperformance of pay over inflation since the three months to April 2008, the ONS said.

Inflation, as measured by the consumer price index, stood at 0.5% in December and then fell further in January as oil prices tumbled and food prices also declined. The ONS said total pay jumped by 2.4% in December from the same month a year earlier, the biggest lead over inflation since March 2010, helped by a higher number of bonuses paid than in December 2013. Excluding bonuses, average weekly earnings, rose by 1.7% in the last three months of 2014, slightly less than expected by economists in a Reuters poll and slower than 1.8% in the three months to November.

But it was also the biggest outperformance of pay over inflation since April 2008, and Simon Wells, an economist at HSBC, said the number was stronger than it looked because the ONS had revised up numbers for late 2013. Mr Wells also pointed to a sharp fall in the number of people claiming unemployment benefit — down 38,600 compared with economists’ forecasts for a decline of 25,000 — which suggested unemployment could fall faster than the BoE expects in 2015.

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