The annual rate of retail price inflation has been higher than the rate of growth in take home pay for 23 of the last 36 months to June 2011. This means the average UK household has experienced continuous falling levels of spending power and highlights the true squeeze on UK consumers.
Public sector workers see no change in pay growth this month according to the VocaLink Take Home Pay Index. At the same time, private sector take home pay growth falls to 2.9% this month, ending a three-month growth spell.
Annual growth on the VocaLink Public Sector Take Home Pay Index stands at 1.3% in July - the same rate as June and the slowest of all the pay sectors. Public sector workers faced a steady decline in pay growth since April this year, when pay freezes came into force for many.
Across the private sector, growth on the VocaLink FSTE 350 Take Home Pay Index has fallen by 0.4 percentage points in the three months to July to sit at 2.9%.
Despite this fall, annual take home pay growth outstrips the public sector and remains elevated compared with the average growth over the last 12 months of 1.3%. This is largely due to the £1,000 increase in Income Tax free personal allowances at the start of the current tax year.
This month's VocaLink data shows a continued rise in take home pay growth for the manufacturing sector. Three month annual pay growth climbs from 2.4% in June to 2.6% in July - the fifth consecutive monthly increase.
In contrast, annual growth in the services sub-index has fallen from 3.4% in June to 2.9% in July. The service sector continues to face a challenging trading environment with several retailers closing and job cuts in financial services over the past week. Despite a fall in pay growth the FTSE 350 Index remains notably higher today than in 2010, when growth in take home pay averaged just 1.0%.
Overall, take home pay growth continues to trail behind the rising cost of living, with annual consumer price index (CPI) inflation standing at 4.2% in June. As pay growth fails to live up to inflation, household spending power continues to decrease in real-terms which is a key cause of weak economic growth in the UK at present.
Commenting on July's statistics, Marion King, CEO at VocaLink, said: "UK households are £1,212 worse off today than two and a half years ago. With pay growth failing to keep up with rising inflation, household spending power continues to fall which a key contributor to the weak economic growth in the UK at present.
"Pay growth remains weak for both public and private sector sector workers. Across the public sector we are seeing the true bite of pay freezes while the positive impact of Income Tax changes is being partially offset by the weakness of gross earnings growth in the private sector. We have also seen a significant fall in pay growth in the service sector, probably reflecting the difficult trading environment for retailers. With pay growth failing to keep up with inflation, household spending power continues to fall compared with a year ago - a key contributor to the weak economic growth in the UK at present."
Douglas McWilliams, chief executive of economics consultancy Cebr, added: "Despite the recent fall in the rate of inflation, take home pay growth is still failing to keep pace with the rising cost of living. Moreover, inflation could start rising again later this year as utility companies increase gas and electricity prices; both Scottish Power and British Gas have announced double-digit percentage point increases in prices."
