Adjust for Inflation
How quickly wages are growing is often a matter of political intrigue. This article looks at claims about UK wage growth, and why it is generally preferable to adjust wages for inflation.
Fastest for two years: In real terms (after accounting for inflation), wages are growing at their fastest rate for two years.
Ten years if inflation is ignored: Ignoring inflation, the UK currently has the highest wage growth rate for a decade.
A medium of exchange: Money is exchanged for goods and services. We should account for changes in prices in those goods and services.
Headlines and Lines to Take
Dominic Raab MP (Conservative, Esher and Walton), the former Secretary of State for Exiting the European Union, erroneously claimed on Twitter:
ONS data showing real wages rising at fastest rate in 10 years
This claim was later retracted.
What is happening with wages then?
We need to look at the UK labour market statistics produced by the Office for National Statistics. In this article, I use the December 2018 report, which covers wages in August to October 2018.
These are survey estimates, based on a regular survey of businesses in the UK, where all businesses with 1,000 or more employees are always selected.
Looking at annual growth rates in regular pay, excluding bonuses, between August to October 2017 (12 months earlier) and August to October 2018:
- Cash terms: Increased by 3.3%, the annual growth rate has not been higher since September to November 2008 — in about ten years;
- Real terms: Increased by 1.0%, the annual growth rate has not been higher since October to December 2016 — in about two years.
Annual growth in total pay— which includes bonuses — tells a similar story:
As Full Fact state in their headline: wage growth is fastest in a decade only if you ignore inflation.
Why you should adjust for inflation
It is important to know how quickly wages rise in cash terms. However, it must be clear in news reports that these figures that they do not account for inflation. Real wage increases should also be stated.
Money is a medium of exchange. We buy goods and services with our wages: the roof over our head, the heating in our home, the food on our table.
If those goods and services get more expensive, unchanged pay means you effectively get poorer. In economic terms, purchasing power has reduced.
The Office for National Statistics adjusts wages for its preferred measure of inflation(CPIH, which includes owner-occupier housing costs).
Wages in cash terms are growing in the UK at their fastest rate for a decade. Once you adjust for inflation, wage growth is at its highest for two years.