Nominal average earnings fell in the first months of this year for the first time since at least the 1960s.
A report released by Capital Economics, a macroeconomic research group, says that the fall is the first since the Office for National Statistics average earnings index began in 1965. The report’s authors say longer-run data suggests that the contraction in earnings could be the first since the 1930s.
Statistics from January show that wage growth fell from 3.4% to a drop of 0.2%. February saw an even steeper reversal of 1.9%, with private sector growth falling 3.9% over the month.
The majority of this fall can be attributed to the severe cuts in bonuses awarded to City workers, which were shown up during what would traditionally have been bonus season.
However, the report notes that the 2.9% annual growth in salaries excluding bonuses was still the lowest since 1997, suggesting pay freezes and deferred settlements have started to make an impact.
With pay growth slowing and unemployment rising the prospects for a rise in consumer spending remain remote, posing the possibility of a prolonged period of economic weakness.
Because of this, the report says the danger of deflation is significantly greater than that of inflation over the medium term. This should give some relief to economists concerned about the inflationary risk posed by the Bank of England’s quantitative easing policy.