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How do wage changes factor into the cost of living crisis across the country?

Prices of goods and services may be stabilising, but consumer spending power is still far from where it was at the beginning of the crisis.

Blog post published on 5 July 2023 by Valentine Quinio and Olivia Vera

So far, the cost of living crisis has understandably focused on the rising price of everyday needs like groceries and energy. The price of these goods has been increasing at higher than usual rates for over a year, but what does this mean for consumer spending power? Wages data helps understand the other side of the story. This blog looks at how it plays out across the country.

Nominal wages have increased in every city

National headline figures, published earlier in June, showed a strong pay growth, with regular pay at 7.5 per cent higher in April 2023 than a year ago.

This is the highest increase we’ve seen in at least 20 years. Part of the increase is explained by tightness in the labour market, in some sectors at least, which means that firms have had to respond to inflationary pressures by raising wages. But the bulk of the increase is likely to be driven by the 9 per cent increase in the National Living Wage last April suggesting that nominal wages are unlikely to increase by a similar rate in the next few months.

Looking at city-level data shows that the scale of the increase varied quite a lot from place to place (Table 1). It went from less than six per cent in Northampton, Southampton, and Aldershot to more than 10 per cent in Cambridge, Dundee, and Bournemouth. Twenty-five cities had increases above the national average.

Table 1: All cities have seen an increase in nominal wages

City	Top 10 increase Nominal Wages April 2023, Year on Year (%)	City	Bottom 10 increase Nominal Wages April 2023, Year on Year (%)
Bournemouth	12	Huddersfield	6
Dundee	12	Oxford	6
Edinburgh	12	Milton Keynes	6
Cambridge	11	Exeter	6
Aberdeen	11	Leicester	6
Glasgow	10	Plymouth	6
Burnley	9	Warrington	6
Blackburn	9	Southampton	5
Slough	9	Aldershot	5
Gloucester	8	Northampton	4

Source: ONS

But real wages are still falling in most cities

Inflation might be on a downward trend, but with the 8.7 per cent year-on-year increase in April, prices are still rising faster than average nominal pay growth.

With real wages going down, the pay squeeze for households is far from being over. Data shows that 53 cities out of 63 have seen real wages fall. Figure 1 shows how this is playing out across the country:

Figure 1: Real wages have shrunk in most cities across the UK

Source: ONS

And the situation is probably worse than this. Inflation last month was largely driven by an increase in food prices. This makes households, particularly those on low incomes, who typically spend a larger share of their income on groceries especially vulnerable to increases in food prices. It means that poorer places are hit harder, particularly when higher spending on groceries is combined with low wages growth.

Cities and towns like Wigan, Telford, Newport and Derby, for instance, where wages grew by less than 8 per cent and where groceries account for about a third of overall consumption basket are particularly badly affected.

Wages and inflation are converging in most cities

There is glimmer of good news: the trajectories of nominal wages and prices are converging. Take Huddersfield, for instance (Figure 2). With nominal wages 6 per cent higher than last year, and an inflation rate that is starting to drop, real wages are still down from last year (2 per cent), but at a much lower rate of decline than earlier this year. And if inflation reduces over the next few months and nominal wages continue to grow, real wage growth might well become positive again, for the first time since the cost of living crisis began.

Figure 2: Real wages are still shrinking in Huddersfield, but at a slower rate than last year

Source: ONS

But real wages are a long way from their January 2021 levels

So, is recovery around the corner? Not quite. What those year-on-year indicators don’t show, by definition, is how far places are from the position they entered the crisis about 18 months ago.

Table 2 below shows that all 62 cities had monthly average wages lower in April 2023 than in January 2021.

Table 2: All cities have had real monthly wage losses since January 2021, with some much worse off than others

City	Top 10 Real Wages loss, April 2023 vs January 2021 (£)	City	Bottom 10 Real Wages loss, April 2023 vs January 2021 (£)
Oxford	-237.9	Mansfield	-82.8
Aldershot	-232.3	Slough	-78.1
London	-193.0	Peterborough	-74.8
Cambridge	-186.6	Burnley	-67.7
Swindon	-183.9	Dundee	-64.7
Reading	-179.7	Blackburn	-60.5
Swansea	-176.5	Ipswich	-56.3
Warrington	-167.0	Glasgow	-47.9
Brighton	-161.9	Bournemouth	-34.2
York	-156.8	Aberdeen	-7.6

Source: ONS

In Oxford, this means monthly wages have dropped from £2,978 in January 2021 to £2,740 in April 2023 (in January 2021 prices). In general, economically stronger cities have seen larger drops in absolute terms, in part because they tend to have higher average wages.

This means that even as inflation slows, spending power will still be squeezed until real wages recover

With inflation slowing down, it is hopefully the start of the end of the cost of living crisis. But the squeeze on households’ budgets won’t ease until wage growth catches up. To achieve this, the UK needs to generate economic growth – reversing the decade-long trend of productivity stagnation – which requires a proactive government programme to support and invest in places across the country.