Pressure on UK household budgets increased, data showed on Wednesday, as the gap between annual average earnings and consumer price inflation (CPI) widened.
The Office for National Statistics published its monthly labour market report for July, showing that the rate of UK unemployment dipped further to 4.3% from 4.4% in June.
But market watchers were more closely following data showing average earnings, which have consistently undershot CPI this year, undermining prospects for a consumer-led boost to growth in the second half of the year.
Average earnings in July rose by an annual 2.1% the data showed, keeping to the same rate of growth seen in June, and defying economists' expectations of a rise to 2.3%.
With CPI inflation extending to 2.9% in August, from 2.6% in July, according to figures published on Tuesday, the squeeze on consumer spending has become increasingly uncomfortable for British households.
The data was likely to come as a disappointment to Bank of England economists who have predicted that wages will rise as the labour market tightens and that inflation would peak at 2.8% before dipping back towards its 2% target rate.
Brexit and weak sterling
Weakness in sterling exchange rates since the Brexit vote last June have kept inflation stubbornly high as retailers hike prices on more costly imported goods, while manufacturers pass on the impact of rising raw materials costs.
Meanwhile, companies are facing the uncertainties of Brexit and its political implications by deferring wage increases and other major budgetary decisions until more is known on the terms of Britain's divorce with Europe.
"With inflation reaching 2.9% in August, the squeeze on households’ real incomes probably intensified," said Andrew Wishart, UK economist at Capital Economics.
He added: "That would make the risk of a sharper downturn in consumer spending the overwhelming concern to the majority of the MPC members."
Public sector pay rises
Some relief for public sector workers was announced this week as the government scrapped its austerity-driven 1% cap on public sector pay rises.
Effective this year, prison officers will receive a 1.7% increase, while police officers get a 2% rise.
“Even with the lifting this week of the public sector pay cap in England and Wales, pay rises for civil servants are likely to stay well below inflation, and it’s a similar story across much of the private sector," said Mariano Mamertino, EMEA economist at the global job site, Indeed.
With few positives in the data, the markets were subdued. The FTSE 100 was down 0.5% at 7,361 in mid-morning trade.
Sterling was also weaker, retreating from earlier gains to stand 0.1% lower against both the dollar and the euro.