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Real wages fall as inflation hits 2.3%

24 March 2017

Real wages fall as inflation hits 2.3%As inflation passes the Bank of England's 2% target for the first time since 2013, economists warn that higher prices are damaging real earnings and weakening the UK's growth potential.

The Office for National Statistics (ONS) has reported that the Consumer Price Index (CPI) hit 2.3% in February, up from 1.9% in January.

It means that falls in real earnings have come sooner than expected, according to the Resolution Foundation. Its pay projection shows that real earnings growth fell to zero in February and is likely to have fallen further once figures for March are confirmed (between -0.3% and 0%).

"After 38 months inflation is back above the Bank's target, bringing to an end the era of ultra-low inflation that has boosted living standards in recent years," said Stephen Clarke, economic analyst at the Resolution Foundation. "Today's rapid increase is part of a wider trend with price rises set to be the big living standards story of this year. To date, pay settlements have failed to respond to rapidly rising prices, meaning there's a good chance pay packets are already shrinking in real terms."

Michael Martins, economist at the Institute of Directors (IoD), agreed that "real wages will likely have shrunk in the first quarter of 2017". He said: "The squeeze on disposable incomes will likely begin to eat into the UK's consumption-driven economic growth in the medium-term."

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), also warned that "UK price growth is firmly on an upward trajectory".

He said: "The decline in the value of sterling, together with rising oil and other commodity prices, is likely to maintain the upward pressure on consumer prices in the coming months. We currently forecast that inflation will remain persistently above the Bank of England's 2% target over the near term, peaking at close to 3% in the second half of 2018.

Rising inflation is likely to damage the UK's growth prospects, he added. "Businesses continue to report that the rising cost of raw materials are squeezing margins, forcing many firms to raise their prices. Higher inflation is also likely to materially squeeze consumer spending in the coming months as price growth increasingly outpaces earnings growth."

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