Earnings and inflation figures show continued weakness of the economy

Lower inflation is welcome but the squeeze on earnings continues, says Prospect analysis of the latest inflation figures

Wages actually fell back in January 2012 and have been falling or flat for several months according to the Average Weekly Earnings figures.

The largest fall in earnings growth was in the finance and business services sector, where smaller bonus payments reduced the increase from 5.8 per cent in August 2011 to 1.8 per cent in January 2012. Regular earnings growth also fell from 4.1 per cent to 3 per cent over the same period but still outperforms every other sector.

Earnings growth in the public sector (not including nationalised banks) is lower than any other sector reflecting the impact of the pay freeze. Earnings growth in January 2012 was 0.7% including bonuses and 0.7% excluding bonuses.

Slower earnings growth is also being felt in services, the largest sector of the economy, at just 1.6% including bonuses and 1.8% excluding bonuses.

The Consumer Prices Index of inflation fell from 3.6 per cent to 3.4 per cent in February; the Retail Prices Index dropped from 3.9 per cent to 3.7 per cent.

Inflation has been falling for several months – from the September 2011 peaks of 5.2 per cent and 5.6 per cent respectively.

Despite the fall in inflation, there are still underlying cost pressures on take-home pay.

Inflation shows how prices are rising year on year, so the VAT rise, from 17.5 per cent to 20 per cent in January 2011, fell out of the index last month but goods in shops still charge 20%. Similarly the year-on-year rate of increase in utility bills has slowed rather than stopped.