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Spending to fall as pay stays below inflation

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A disparity between rising wages and the cost of living will add to the existing pressures on consumer spending, new research published today suggests.

Income data services website IDSPay.co.uk predicts that private sector pay will continue to grow in 2011 but at a slower speed than overall inflation for the second year running.

According to the research, the rolling three-month period to the end of November 2010 saw median pay settlements increase by 2.2 per cent, the highest level it has reached in the aftermath of the recession.

Despite this rise, inflation is growing at a faster rate and even if earnings improve further in 2011 most people’s expendable cash will most likely shrink.

Vicky Redwood, Chief Economist at Capital Economics, commented: “We doubt that pay growth will accelerate this year, given that unemployment is likely to rise and the public sector pay freeze takes effect.

“Accordingly, we doubt that pay will rise as fast as the cost of living. In fact, with CPI inflation set to remain above three per cent for several months yet, even if pay rises by three per cent, real earnings will probably still fall.

“We expect all this to contribute to a renewed drop in consumer spending this year.”

The Office for National Statistics (ONS) figures have shown the all-items RPI measure, which is typically used to set pay increases, did not drop below 3.7 per cent in 2010, and spent much of the year above four per cent.

In the 12 months to November 2010 the RPI figure was 4.7 per cent according to the ONS and with a number of additional pressures on consumers all hitting at once, retail sales are likely to be affected.

Antony Wroe, Chairman of Sales and Retail at the Recruitment & Employment Confederation (REC), told Retail Gazette that while average pay in the retail sector is likely to grow at the same speed as other sectors, executive pay may begin to fall.

“The sector will reflect other sectors in that most ‘ordinary’ workers will receive a pay increase this year of around three per cent,” he said.

“When it comes to executive remuneration, this will be much greater. The disparity between executive and average pay in companies is, however, becoming of greater concern to key stakeholders in companies, not least shareholders.

“With many retailers issuing profit warnings, what we can expect to see is much greater scrutiny over executive pay in retail. We certainly won’t see the 38 per cent growth in pay that we’ve seen in the last five years.”

Published on Thursday 06 January by Editorial Assistant

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