Real wages in June 2023 were higher than a year ago for the first time in 18 months, ending a pay squeeze across Britain.
Wages grew 7.8% in the three months to June, the fastest annual rate since records began in 2001, according to figures from the Office for National Statistics.
Darren Morgan, ONS director of economic statistics, said: "Coupled with lower inflation, this means the position on people's real pay is recovering and now looks a bit better than a few months back."
When adjusted for inflation as measured by the consumer index including housing costs, wages rose on the year by 0.5% when including bonuses, and 0.1% when excluding them.
Inflation, the average pace at which prices are rising, has eased but remains relatively high at 7.9%.
Prime Minister Rishi Sunak said there was "light at the end of the tunnel" for the millions struggling with the cost of living.
Welcome news for workers but not for policy makers
However, high inflation and strong wage rises will stoke concerns that price rises will take longer to ease and that interest rates will rise once again.
Sushil Wadhwani, a former member of the Bank's rate-setting Monetary Policy Committee, said financial markets believe an interest rate rise at the next meeting in September is a "virtual certainty".
Nye Cominetti, senior economist at the Resolution Foundation, said:
"Pay growth accelerated in June to end Britain's painful 18-month pay squeeze.
"This welcome news for workers won't be shared by policy makers at the Bank of England though, as it will put further pressure on their efforts to curb inflation. They will hope that rising unemployment and falling vacancies will take the steam out of pay rises in the coming months."
There are signs in the ONS's data that the UK jobs market is weakening, with the unemployment rate rising from 4% to 4.2%, while the number of people in jobs has lowered.
"The fall in employment in the three months to June and further rise in the unemployment rate will be welcomed by the Bank of England as a sign labour market conditions are cooling," said Ruth Gregory, deputy chief UK economist at Capital Economics.
Triple lock
The wage figures are likely to intensify political debate over next year's rise in the state pension, which is governed by the triple lock.
Government policy means the state pension rises every April in line with one of three factors: 2.5%, average wage growth year-on-year as measured between May and July or the inflation rate in the previous August - whichever is higher.
The latest signals suggest the rise to the triple lock will be relatively high, which is likely to prompt discussion over the potential increase in the state pension and allocation of wider Government spending.
Businesses struggle with employment costs
Jane Gratton, deputy director of the British Chambers of Commerce (BCC), said the ONS's figures "highlight the unrelenting workforce pressures businesses are facing".
"In a tight labour market, employers are struggling to contain wage inflation as the expectations of their staff and job candidates continue to rise," she continued.
Earlier this month, the BCC reported in a survey that labour costs had become the leading cost pressure for businesses, overtaking utility costs.
Gratton said: "The tight labour market continues to ramp up wage costs, fuelling inflation, and creating huge difficulties for businesses.
"With the Bank of England expected to increase interest rates again, it is vital that the Government boosts efforts to increase the supply of labour to help break the cycle."
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