After inflation, real pay including bonuses and commissions fell by 0.9% while regular pay excluding bonuses was down 2.8% – a record drop in real wages.

The highest pay growth was in the business services and finance sector at 8.2% and construction at 8.1% – both ahead of inflation. Pay in manufacturing was up 5.1%.

The latest employment figures from the Office for National Statistics (ONS) showed a stronger than expected jump in the number of people getting into work, with 296,000 extra jobs filled in the three months to May – almost double the 153,000 forecast.

Ruth Gregory, senior UK economist at Capital Economics, said: “The strong rise in the supply of workers in May helped to take some of the heat out of the labour market.

“Even so, the sharp increase in employment and pick-up in wage growth supports our view that the Bank of England will have to raise interest rates to a peak of 3%, instead of the analyst consensus of 2%,” she said.

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Higher wages driven by strong demand for labour is adding to already rampant inflation, which the Bank of England estimates will rise to more than 11% this autumn.

With its target inflation rate of 2% and the risk the economy slides into a toxic wage price spiral, pressure to raise the base rate from 1.25% is growing.

Markets are pricing in a 0.5% rise in August, another 0.5% rise in the autumn and possibly a further 0.25% rise later in the year.

May’s figures also revealed that while private sector pay grew 7.2% with inflation at the time 7.3%, public sector pay growth was up just 1.5% – one of the highest gaps on record.

Effective pay cut

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Public sector pay is in the doldrums, and hasn’t been this low for the past five years. Some 5.72 million public sector workers are wrestling with an impossible effective pay cut.”

The figures come as Britain battles with a surge of industrial disputes over pay, with multiple rail strikes set for the summer.

“This is unlikely to be the last of them,” Coles said. “The government has proposed public sector pay rises of 5%, and union leaders are calling for inflation-linked pay rises.

“The leadership debates, meanwhile, confirmed that none of the Conservative leadership hopefuls is prepared to give an inch. They want to avoid pay rises feeding into an inflationary spiral, so public sector workers are expected to absorb the pain from rising prices.”

Fall in living standards

Richard Carter, head of fixed interest research at Quilter Cheviot, said although the number of full-time employees was at a record high by the end of May, “the nation has still been gripped by staff shortages in recent months – with some industries faring much worse than others”.

He said: “Airline and airport staff numbers are still far too low for the surge of holidaymakers making up for lost time, and this is reflected in the ever-rising number of job vacancies which rose to a record high of 1,294,000 in April to June 2022.”

Coles warned that things look set to get worse in June, with experimental statistics showing wages up just 6.6% in a year at a time when markets expect inflation to be closing in on 10%.

“The HL Savings and Resilience Barometer shows that real disposable income fell 3% in the three months to July,” she said. “This is what it feels like to live through the biggest fall in living standards in a generation.”