Press release

15 Feb 2022 London, GB

Inflation makes its impact on real pay growth – EY ITEM Club comments

Employment rose in December despite the adverse effect on GDP from the Omicron wave. But a fall in the unemployment rate to 4.1% in Q4 from 4.3% in the previous quarter was partly a reflection of higher inactivity.

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Related topics Growth COVID-19
  • Employment rose in December despite the adverse effect on GDP from the Omicron wave. But a fall in the unemployment rate to 4.1% in Q4 from 4.3% in the previous quarter was partly a reflection of higher inactivity.
  • PAYE employees rose in January offering more signs that the jobs market was little-affected by Omicron. However, a slowdown in pay growth at the end of 2021 exacerbated the negative effect of inflation on real wages.

Martin Beck, chief economic advisor to the EY ITEM Club, says:

“The latest labour market numbers suggest that the jobs market largely shrugged off the drag on activity from Omicron in December. The LFS single-month employment measure showed the number in work in December rising slightly on three months earlier, the first increase on this basis since September. Average employment in Q4 was still down on the previous quarter, although a rise in inactivity meant the employment rate ticked up to 75.5% from 75.4% in Q3. And the LFS jobless rate fell 0.2ppts, from 4.3% to 4.1%. 

“Timelier – but admittedly prone to downward revision – PAYE data showed employee numbers rising 108,000 in January and was another positive development. The labour market remains tight too: vacancies were at 1.3m in three months to January, another record high. 

“However, that tightness did not stop total year-on-year (y/y) growth in average pay in Q4 slowing slightly to 3.7% from 3.8% in the three months to November. Annual pay comparisons are not yet entirely free of COVID-19- and furlough-related distortions. But the negative effect of inflation (which averaged 4.9% on the CPI measure in Q4) on growth in real pay is building. Inflation is likely to rise to over 7% in the spring, and there is little sign yet that the pandemic has delivered a serious increase in workers’ bargaining power, outside specific sectors. So, the outlook for real wages, and associated pressure on consumer spending, is set to get worse before it gets better.”