On Wednesday, the latest official employment data released by the Office for National Statistics showed a fall in the unemployment rate to 6.9 per cent and a rise in the growth rate of one measure of annual earnings. Strong stuff. Important stuff, too – and not only for the Bank of England and what’s left of its forward guidance policy. The relationship between wages and prices is politically important; the government has been keenly waiting for the day that pay outpaces inflation.

Is this the day? Not quite.

This is perhaps the most important chart from the ONS release. It shows the annual growth rates of CPI inflation (yellow line) and pay including (dark blue line) and excluding (light blue line) bonuses for the past five years. The latest pay data refer to the annualised growth over the three months from December to February. As you can see on the right hand side of this graph, for the first time in about four years, there is convergence: total pay (including bonuses) for employees was 1.7 per cent higher than a year earlier and CPI inflation in February was also 1.7 per cent.


On Tuesday, official data showed that UK inflation, as measured by the Consumer Price Index, rose by 1.7 per cent in the year to February, a slower pace than the 1.9 per cent reported last month. Employee earnings adjusted for CPI fell at their slowest pace since April 2010. If “real wages” were to rise this year, the government hopes this fact would protect it from attacks by the opposition Labour party about the cost of living. The gap between inflation and earnings is more than simply a technical matter.

However, that makes the technicalities more important to understand. The analytical debate about “real wages” tends to focus on measures of wages. But how inflation is measured obviously matters, too. This chart from the Resolution Foundation shows two forecasts for real weekly median earnings – one using CPI and the other using RPI-J, a supplementary measure that includes housing costs and has a controversial history.