02Wage growth has failed to keep pace with inflation

High inflation is only one side of the equation. Assessing the impact rising costs have on living standards requires an understanding of how inflation compares with nominal wages growth. When prices grow faster than nominal wages, consumer spending power is squeezed.

Table 2 looks at how average nominal wages have changed in the past year across cities. While the geography is not particularly clear-cut (although a number of cities that have experienced the highest wage growth are in the Greater South East), the scale varies significantly between places- ranging from more than 7 per cent of wage growth between Ipswich and Swindon to less than 3 per cent in Bournemouth and York.

But once these average nominal wage growth rates are adjusted to inflation, both the scale and the geography of the cost of living crisis become clear again. In real terms, wages have fallen everywhere in the past year, but the cities that combined low nominal wage growth and high inflation rates experienced a particularly severe downturn. As Figure 6 shows, many of these are located in the North – like Burnley, Blackpool or Barnsley, where real wages fell by nearly 7 per cent. Cambridge and Bournemouth are exceptions to this but as Table 2 shows, this is explained by sluggish (and even negative in Cambridge’s case) nominal wage growth, not by high inflation rates.

The wider the discrepancy between nominal wages growth rate and inflation rate, the larger the fall in real wages. Figure 7 illustrates how these dynamics play out – using Milton Keynes and Blackpool as an example.

In Milton Keynes, nominal wages in April 2022 were about 6 per cent higher than in April 2021. However, with an inflation rate at 9.6 per cent, prices rose at an even faster pace and over that year, real wages fell by more than 3 per cent.

In Blackpool, this divergence between inflation rate and nominal wage growth is even greater, as the city is doing worse than the national average on both counts. The result is that real wages fell by nearly 7 per cent between April 2021 and April 2022, more than double the rate in Milton Keynes.

So how does this translate into absolute spending power? All places are worse off, but those where wages were already well below average before the cost of living crisis are the hardest hit. There is a clear geography to it: Figure 8 shows that as of April 2022, workers in the North, Midlands and Wales were on average £131 a month poorer (a 5.8 per cent decrease) than in April 2021; compared to workers in the South who were around £103 worse off than in May 2021 (3.1 per cent decrease).¹⁰

In aggregate terms, inflation reduced April 2022 wages in the North, Midlands and Wales by around £915 million (since April 2021), compared to approximately £750 million in the South of England. The loss of spending power in the North, Midlands and Wales is roughly the equivalent of Sheffield’s entire monthly wage bill in April 2022 and two times the total monthly wages paid in Brighton.