Cost of living outstripping pay packets by biggest margin for 20 years

Workers are facing the biggest strain on their family finances for nearly two decades, figures reveal today.

They are struggling with the largest gap between pay rises and cost of living rises since 1990.

Research from pay experts at Industrial Relations Services found the average pay rise across the private and public sector is 3.2 per cent.

But the retail prices index measure of inflation – which many believe is more accurate than the Government's consumer prices index – is 4.6 per cent. This is a gap of 1.4 per cent, the biggest recorded since October 1990.

The research is based on pay rises at 266 different firms in the three months to the end of June.

Sheila Attwood, who edits a regular online pay bulletin for IRS, said: 'Many employees are facing a bleak summer as the value of their pay rise is eroded by increases in prices, particularly for fuel and utilities.'

She warned that workers are in for a 'long run of below-inflation pay rises', with the public sector being particularly badly hit.

With food and fuel bills soaring, the financial struggle for millions of families is becoming ever tougher.

On an average salary of £23,750, a 3.2 per cent pay rise is equal to taking home less than £10 extra every week. This does not even begin to cover cost of living rises.

The average cost of filling up the fuel tank at the moment is £60. Food price rises are equally punitive.

A family spending £100 a week on food must find an extra £17.80, or £925 a year, according to the Daily Mail Cost of Living Index.

The price of essential foods such as margarine, milk, bread and butter have soared by up to 44 per cent over the last year.

Even salaries enjoyed by City workers – the best-paid in Britain – are falling.

The average is £50,645, down 1 per cent from last year. Bank of England deputy governor Charlie Bean warned last night that inflation is rising faster than expected.

In a speech in London he said recent economic data 'points to a worse near-term prospect for both growth and inflation'.

Shadow chief secretary to the Treasury, Philip Hammond, said: 'This research shows exactly why life is getting tougher for Britain's hardpressed families.

'Living costs are outstripping people's pay rises, leaving families' incomes squeezed.'

Many have been forced to make radical changes to their lifestyle, cancelling foreign holidays and scrapping meals out.

Some are trying to earn extra money by taking on second jobs or pawning possessions.

Many workers also face job insecurity. Unemployment is predicted to rise by up to 900,000 over the next two years.

Research published yesterday by the recruitment firm Morgan McKinley shows it currently takes an average of 59 days to find a new job, 16 days longer than last year.

The news comes as one of the country's most respected forecasters warns that Britain faces the threat of an inflationary 'explosion'.

The National Institute of Economic and Social Research think-tank said the Bank of England should raise interest rates by a quarter point to 5.25 per cent.

In its quarterly economic outlook, it said: 'The most damaging risk to the outlook for inflation is increasing inflation expectations becoming embedded into wage bargain outcomes.

'Given the balance of risks, a short, sharp shock to expectations from an increase in the Bank rate would be appropriate this year.'