UK workers receive first real pay rise for four years

British workers have enjoyed the first real pay rise since 2010, according to official figures, with salary rises overtaking inflation. Photograph: Alamy

British workers have enjoyed the first rise in their real pay for four years with wage rises finally overtaking inflation, official data is expected to confirm this week.

Economists believe inflation ticked down to 1.6% in March from 1.7% in February while annual wage growth is thought to have been 1.8% in the three months to February. Without bonuses, pay growth was 1.7%, according to the poll of economists by Reuters.

If confirmed, those rates will mark the first rise in real pay since April 2010, a month before the coalition came to power. Pay growth has not been consistently above inflation since 2008.

"This week's data releases should confirm that wages are now rising faster than prices of goods and services. Previously price increases were outpacing pay growth, meaning that households could afford to buy less and less with their pay cheques. The situation is now reversing and household purchasing power is on an improving trend," said Alan Clarke, economist at Scotiabank in London.

"Falling real wages has been a significant drag on the overall economic recovery in recent years, holding back consumers' purchasing power.

"That said, falling real incomes didn't get in the way of robust consumer spending growth over the last year. Household spending growth outpaced income growth as consumers saved less (or borrowed more) – encouraged by the buoyancy of the housing market. That boost from the housing market won't last for ever, so it is encouraging that rising real incomes should be an ongoing driving force behind consumers spending, even after the sugar rush from the housing market has become exhausted."

The thinktank Capital Economics expects both inflation data on Tuesday and labour market figures on Wednesday to bring good news for households and the wider economy.

"This week's official data may show that the squeeze on real pay is now over. The headline rate of annual pay growth looks set to have outstripped consumer price index inflation in February. What's more, March's consumer prices data are likely to show that inflation eased further in the following month. Meanwhile, the unemployment rate probably resumed its downward trend in February," say its economists in a research note.

The thinktank expects the unemployment rate to have dropped to 7% in the three months to February, while the consensus forecast in the Reuters poll is 7.1%.

Howard Archer, economist at IHS Global Insight, is also forecasting 7% unemployment but predicts much of the focus for this latest batch of labour market figures will be on wage growth.

"Earnings growth finally rising above inflation would be a positive development for the economy's growth prospects. Earnings have been very low for a prolonged period and are markedly beneath long-term norms, so a gradual but sustained rise should not pose a significant inflation risk for some considerable time to come," he says.

"Earnings growth moving above consumer price inflation would also be a very welcome development for the government given Labour's focus on the cost of living."

With the general election just over a year away, Labour have sought to focus attention on how strongly inflation has outstripped pay growth, adding to the burden on households from the coalition's austerity drive. Inflation figures on Tuesday, however, are expected to show the pressure easing.

A supermarket food price war and lower petrol price inflation are expected to have brought the headline consumer price index (CPI) measure of inflation down for the sixth month running in March.

Philip Shaw, economist at Investec, expects CPI to come in at 1.5%, which would be the lowest rate since October 2009, and he forecasts it will stay relatively low.

"Inflation should remain below 2% over all, or at least almost all of the year. However we are keeping an eye on wholesale food prices – note that wheat prices (in sterling terms) are up 9.5% so far this year, while corn is 17% higher," he said.

The retail prices index measure, which includes housing costs and is used to set many pay deals, is forecast to have fallen to 2.5% in March from 2.7% in February, according to the Reuters poll.