The gap between workers’ pay growth in the UK and inflation is the biggest since records began in 2001.
Announced on 17th August 2022, the UK inflation rate for July 2022 rose to 10.1%, an increase from a rate of 9.4% last month. This is the highest rate of inflation for over 40 years and means many household budgets are being stretched to breaking point.
The rate of inflation is measured by the Consumer Prices Index (‘CPI’) that calculates the cost of an ‘average’ basket of products each month and compares the same products with previous month to calculate the increase in prices. With a fresh increase in energy bills expected this autumn, this is expected to continue its growth. The current rate of inflation demonstrates that the cost of purchasing that average basket of products is 10.1% more expensive than the same basket of products 12 months ago.
The Bank of England has forecast that inflation will reach 13% by the end of the year, while the Resolution Foundation thinktank have forecasted that it could reach as high as 15% by early 2023. Leading Bank, Citi, have announced they expect it to reach 18% in early 2023.
What does this mean for workers?
In the three months to June 2022, against a backdrop of a high number of job vacancies and low unemployment, the Office of National Statistics (‘ONS’) announced that annual growth in average pay, excluding bonuses, strengthened to 4.7% in the three months to June 2022. Growth in average earnings including bonuses was reported as 5.1%.
The pay data released by the ONS also highlights a widening gap between the pay of workers in the private sector, as opposed to the public sector. Pay in the private sector was reported to have risen by 5.9%, while in the public sector the increase was 1.8%
Taking into account the rise in inflation caused by the cost-of-living crisis, the “real value” of workers’ pay, however, has dropped by 3%. This is because the rate in which workers pay is increasing is slower than the rise in prices. Despite there being an increase in workers’ pay, their money is going less far. This is the fastest fall in the rate of pay in over 20years.
The accountancy firm, PricewaterhouseCoopers (‘PWC’), conducted research into pay rates and identified that the pay of the richest 1% of workers rose by almost four times the rate of the poorest 10th. Thishighlights how lower income households are significantly more affected by therise in inflation and the cost-of-living crisis than middle and higher incomehouseholds.
How is inflation controlled?
Once the rate of inflation has been established – currently at 10.1% - it’s the responsibility of the Bank of England to set the monetary policy to try and prevent it from increasing further. The Bank of England’s target inflation rate is 2%.
The main way the Bank of England does this is through increasing interest rates. Interest rates reflect the amount of money that people get in interest on their savings as well as the charge they need to pay for having loans, credit and mortgages. The value of savings will increase, so savers benefit by an interest rate increase. The cost of borrowing, however, is increased.
By increasing the Bank of England base rate of interest, this leads to a reduction in demand for goods and services as they cost more. In turn, this reduces inflationary pressure because people restrict their spending.
How does PayCaptain help?
As identified by PWC, in times of increased cost of living, more financial pressure is placed upon the lower income households than any other.
PayCaptain was launched to pay employees irrespective of their financial position, but it has a wealth of features to help those who are more financially vulnerable. The PayCaptain solution offers the following functionality to help employee’s financial well-being:
On demand pay
On-demand pay is where an employee can access up to 50% of their accrued earnings ahead of pay day. This can help ease the burden of a financial shortfall and help employees to meet their short-term financial obligations.
With PayCaptain, monthly paid employees can ease their immediate financial pressures by using the automatic Weekly Advances feature. Employees can access up to £50 of their accrued earnings each week, paid directly into their bank account every Monday morning.
These advances can be helpful for employees to manage part of their budget on a weekly basis, whilst keeping keep funds protected for their bills and direct debits at the end of the month.
As well as the Weekly Advances feature, PayCaptain also gives employees the option to access up to £200 of emergency cash, as long as the salary has been accrued. This allows employees to deal with emergencies when they have no savings to cover them.
This functionality gives the employee the capability to set up automatic payday payments in the app, directly from their net pay. This eliminates the pain of having to move money around after getting paid and also removes the risk of paying essential bills late or missing them entirely.
Employees can set up automatic payday payments to their mortgage or landlord, as well as credit cards or loan repayments. Payments for household or personal bills can be set up as well as payments made to friends or family members.
Employees can pre-plan the amount to save and it is automatically transferred from net pay. This builds some resilience for times of financial hardship. As the interest rate is predicted to continue to rise to counteract the effects of the rise in inflation – in an attempt to slow down spending –the value of savings will increase.
PayCaptain also has a money planning tool – where employees can create a personal budget as well as access to personalised financial guidance which is provided by Money Helper. Money Helper is a confidential and impartial resource where workers can get debt management advice and support, as well as be pointed in the direction of grants and payments to help households with the cost of their bills.
In summary, the rise in workers’ pay is slower than the rise in inflation – the cost of goods and services. This shows the decrease in the purchasing power of the money that we earn. Despite workers being paid more money, the money doesn’t go as far, so workers are financially less well off – poorer in ‘real terms’ by 3%. PayCaptain offers solutions to improve employees financial well-being in these times of hardship.
To learn more about how PayCaptain can help your business and improve the financial well-being of your employees, please contact us for an informal, no-obligation chat. We’ll be happy to demo PayCaptain for you.
PayCaptain Payroll Solutions Limited, www.paycaptain.com is an HR/FinTech company that delivers a fully automated cloud outsourced payroll service. The solution contains many unique and innovative features for employees, helping them to take control of their pay and increase their financial well-being. PayCaptain is a payroll solution that helps employers pay their workforce, regardless of income and personal circumstances. The solution also incorporates functionality that's specifically designed to positively impact financial resilience for people struggling with money, or vulnerable and low-income employees.
PayCaptain is the world’s first payroll company to be B-Corporation certified. To read more about B-Corporations, visit www.bcorporation.net
PayCaptain has been recognised and rewarded with two B Corp ‘Best for the World’ awards for being within the top 5% of highest scorers within both the Workers and Governance impact areas in the B Corporation B Impact Assessment.