Signs have emerged that UK workers may begin to feel some of the pressure on their finances lift this year.
According to the latest forecast from the EY ITEM Club, average earnings are expected to rise by 1.7 per cent in 2014 – an improvement on 2013, when wages rose by just 1.4 per cent. But more importantly, it is also higher than the expected rate of inflation for 2014, since the Consumer Price Index (CPI) is expected to stay at 1.6 per cent.
It may represent a very small rise in real terms – after inflation is factored out – but it is hoped that the figures will mark the beginning of an upward trend that sees the cost of living become easier to manage for individuals and households across the country.
Wages have been falling in real terms for the past six years, since the credit crunch hit and many employers were pushed into financial difficulties of their own. Pay rises have consistently lagged behind inflation. For example, last year average earnings rose by 1.4 per cent, while the CPI rose by 2.6 per cent.
But as the economy recovers and business conditions improve, it seems that more and more businesses are trying to bring pay more in line with the experience and skills of the workforce. The ITEM Club expects the UK economy to grow 2.9 per cent this year and 2.3 per cent in 2015.
Peter Spencer, chief economic adviser to EY ITEM Club, says that rising employment will not derail this trend towards real-term wage increases.
“Growth in the workforce will restrain wage inflation, but not to the extent of impeding a recovery in in real wages,” he said, adding that this would be among a number of important factors that would contribute to slow and steady economic recovery.
New business investment will also improve productivity, he said, which should in turn keep operating costs for organisations low. This could then make more sizeable pay rises more affordable for employers.