A big decline in pay growth since early 2008 is often cited as a reason for expecting lower inflation. This fall, however, largely reflects cuts in bonuses and working time rather than a slowdown in hourly wages.

The official average earnings index measures pay per worker and is separable into regular and bonus elements. The chart shows annual growth in total and regular earnings together with an adjusted regular pay measure taking into account changes in average weekly hours.

Headline earnings growth has fallen from an annual 4.0% in the first quarter of 2008 to 1.2% in the third quarter of this year with the bulk of the decline due to a slowdown in regular pay expansion from 3.8% to 1.8%. This latter reduction, in turn, mainly reflects a cut in average working time from 32.2 to 31.5 hours per week since last year's first quarter.

Regular hourly pay growth, by contrast, has slowed only marginally, from an annual 3.5% in the first quarter of 2008 to 3.4% by this year's third quarter.

Firms may base pricing decisions on trends in hourly pay rather than earnings per worker. This is because reductions in bonuses and working hours are usually associated with lower output so do not result in a fall in unit labour costs.

The limited response of hourly pay growth to labour market weakness may partly explain recent core inflation resilience, although this mainly reflects the impact of sterling depreciation and pass-through of global commodity price rises.