UK wage growth outpaces inflation

Waitress in London restaurant Image copyright Getty Images

Wages grew faster than the rate of inflation at the end of 2016, official figures show.

In the three months to December, wages grew 2.6% on an annualised basis in the UK, according to the Office for National Statistics (ONS).

However, that was slower than the previous period, leading analysts to suggest households could face a "squeeze" on spending later this year.

The ONS also said the jobless rate held steady at an 11-year low of 4.8%.

The number of non-UK nationals working in the UK increased by 233,000 to 3.48 million compared with a year ago.

Household squeeze

"The unemployment rate is now at its lowest in over a decade, but wage growth remains subdued by historical standards," the ONS said in its commentary.

Wage growth slowed from the 2.8% rate seen in the three months to November.

That still outpaced the rise in household prices, but the gap between them narrowed. Annual inflation as measured by the Consumer Prices Index (CPI) reached 1.8% last month, up from a rate of 1.6% in December.

"We expect real household incomes to be squeezed this year," said Ian Kernohan, an economist at Royal London Asset Management.

Ben Brettell, senior economist at Hargreaves Lansdown, agreed: "With inflation forecast to hit 2.8% early next year, a deceleration in pay growth could see real wages fall at some stage."

Record employment

However, Mr Brettell added that the UK jobs market had remained resilient, despite warnings it would be hit by the Brexit vote.

"The UK labour market continues to confound the doom-mongers with its resilience to the Brexit shock," he said.

The employment rate edged higher to 74.6%, which was a record high, according to the ONS data.

"Continued moderate growth in employment has led to a new high in the total employment rate, while the rate for women has reached 70% for the first time on record," said ONS senior statistician David Freeman.

UK unemployment fell by 7,000 to 1.6 million people, the ONS found.

Analysis: Jonty Bloom, business correspondent

Image copyright Getty Images

Why unemployment and employment are not directly linked

It is not the unemployment figures that are interesting these days, it is the employment figures.

There is not the direct link between the two figures that many think. Employment doesn't rise by the same amount that unemployment falls.

That's because many thousands of people leave school or university, come back from maternity leave or just decide to look for work every month, who weren't counted as unemployed.

Those and many other factors, like increasing numbers working beyond the retirement age, help explain why employment has risen to record levels while unemployment only fell by 7,000 in the three months to December.

Less clear is why wages are only rising by 2.6% a year. These levels of employment suggest companies are having trouble finding skilled staff to fill vacancies and that normally forces wages much higher.

There was a small rise in the number of workers born outside the European Union, but a small drop in the number of workers born in other EU countries.

Mr Freeman said those figures "should be treated with caution", however, because they were not adjusted for seasonal changes.

The job figures are based on the Labour Force Survey in which the ONS talks to about 40,000 households, or 100,000 individuals, every three months.

As it is a survey, the results are estimates and have a margin of error.

For example, the ONS is 95% confident that its estimate of a fall in unemployment of 7,000 is correct to within 80,000, so the drop is described as not being statistically significant.

'Experience and knowledge'

Separately, an ONS "flash" estimate indicated that UK productivity grew for a fourth successive quarter in the fourth quarter of 2016 - but at a slightly reduced rate.

It reported that output per hour worked rose 0.3% quarter-on-quarter - the weakest improvement since the fourth quarter of 2015. It was down from gains of 0.4% quarter-on-quarter in the third quarter, 0.5% in the second and 0.4% in the first.

"The UK has a lot of catching up to do on the productivity front and is markedly lagging its performance before the 2008-09 downturn," said Howard Archer, chief UK and European Economist at IHS Global Insight.

He said that part of the UK's recent poor labour productivity performance had been due to the fact that employment held up well during the downturn and then picked up markedly.

More on this story