UK households poorer as inflation sees real incomes fall by 1.6%

By Harry Glass

PUBLISHED: 06:41 EST, 20 June 2012 | UPDATED: 07:53 EST, 20 June 2012

Struggling households are having incomes squeezed ever tighter as the rise in people's pay packets lags behind the ever-increasing cost of living.

While inflation was running at 3 per cent, average total pay - including bonuses - rose by just 1.4 per cent, to £467 a week, the Office for National Statistics (ONS) said.

The good news was that the rate at which real incomes are falling has slowed to a near 30-month low, giving some hope for consumer spending in the months ahead.

Pay day: Private sector workers enjoyed larger regular pay increases although they still earn less generally

Meanwhile yesterday the rate of inflation fell to 2.8 per cent, its lowest level in two and a half years, led by a decrease in the price of petrol.

The Bank of England predicts pressure should ease as the rate of inflation pulls back to the Government's 2 per cent target throughout the year.

But the ONS pay figures - for last year, up to April - 'remain dire', said Scott Corfe, senior economist at the Centre for Economics and Business Research (Cebr).

'The weakness of earnings growth means that household incomes are still struggling to keep pace with the rising cost of living,' he added.

Regular pay - excluding bonuses - rose by 1.8 per cent to £441 per week.

However, over the five months from December 2011 to April 2012 bonus payments were lower than in the same period a year previously. The majority of bonus payments, particularly in the financial sector, are usually made between December and April, the ONS added.

Average total pay in the private and public sectors rose by roughly the same amounts - up 1.3 per cent to £465 per week in the former, and up 1.4 per cent at £479 per week in the latter.

Private sector workers enjoyed larger regular pay increases (without bonuses) although they still earn less generally - up 2.1 per cent at £431 per week, compared to a rise of 1.2 per cent in the public sector to £475 a week.

A survey by Lloyds TSB published earlier this week showed discretionary spending power falling by 0.3 per cent in May, which on average equates to almost £34 a month less than a year ago to spend on non-essential items.

However, Lloyds TSB said growth in essential spending eased, suggesting consumers could be starting to feel the effects of falling inflation.

Today's figures showed that pay is now falling 1 per cent in real terms, after adjusting for inflation, which is the slowest rate of decline since November 2009 and compares to a peak rate of a decline of 3.4 per cent seen last September, when inflation was 5.2 per cent.

Chris Williamson, chief economist at financial information services firm Markit, said: 'Although pay growth continues to run behind inflation, pointing to a squeeze on real incomes, the squeeze has clearly eased, reflecting the combination of falling inflation and faster pay growth, which should help bolster consumer spending.'

Unemployment figures released today also showed that the number of people out of work fell 51,000 to 2.61million in the three months to May, although the number of long-term unemployed remains worryingly high. The number of people claiming jobseeker's allowance in May rose by 8,100 to 1.6million, ending two months of declines.

The unemployment rate has fallen by 0.2 percentage points to 8.2 per cent, lower than the European average of 10.3 per cent.

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