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Evening Standard
Evening Standard
Business
Daniel O'Boyle

Cost of living crisis may already be ending as wages catch up to inflation, economists say

The cost of living crisis may already be ending, economists including those at the Bank of England have said, as wage growth catches up with inflation.

Ashley Webb, UK economist at Capital Economics, says he believes that wages started rising faster than prices last month.

The Bank of England shares a similar view. Last week, the Bank’s deputy governor Ben Broadbent said that he believed wages were already rising faster than inflation.

“Real incomes are growing now,” he said. “In the third quarter real labour income will be higher than in the second quarter.”

Official data will not be able to confirm whether Webb and Broadbent’s estimates are accurate until September, when the ONS publishes earnings statistics for July.

Currently, the most recent earnings data covers May, and found that wages were growing by 7.3%. Inflation was 8.7% in May, but fell to 7.9% in June and appears certain to fall again in July as the lower energy price cap came into effect.

If wage growth does exceed inflation in July, that would end a 15-month run in which real wages have been decreasing, as inflation has been faster than wage growth for every single month since April 2022. In total, real wages are down around 3% since the start of the cost-of-living crisis.

“With CPI inflation soon to fall below average earnings growth, the cost of living crisis appears to be coming to an end,” Webb said.

However, he was not entirely optimistic. Webb’s research suggests that household disposable income will not reach pre-pandemic levels for another 18 months.

“Households won’t suddenly stop feeling the pinch,” he said. “We suspect the level of real household disposable income will remain below where it was before the pandemic until early 2025. And with the full effect of higher interest rates yet to feed through, we still think the economy will enter a mild recession later this year.

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