Wage growth has fallen behind inflation for the first time since 2014 despite the unemployment rate sinking to a 42-year low, official figures show.
Average weekly earnings excluding bonuses grew by a lower than expected 2.1% in the three months to March, the Office for National Statistics said – down from 2.2%.
But the unemployment rate fell to 4.6%, its lowest level since 1975.
The worse than expected earnings figure meant that real terms pay – adjusted for inflation – fell by 0.2% in the first three months of the year.
It is the first fall since the third quarter of 2014.
The figures come a day after official data showed inflation had risen further, to 2.7%, in April. Economists expect it to climb above 3%.
A regular Bank of England survey of business conditions published on Wednesday showed this was already having an impact on firms, with companies reporting that consumer spending power had been “hit by higher prices”.
The labour market statistics for January to March showed total unemployment fell by 53,000 to 1.54 million.
However they also revealed that in April, the number of people claiming unemployment benefit rose by a larger than expected 19,400 to 793,000.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “With inflation forecast to carry on rising… household budgets look certain to be squeezed further in the coming months.
“The economy has surprised on the upside since last summer’s referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch from the current bout of inflation.”
Paul Hollingsworth, UK economist at Capital Economics, said despite the intensifying squeeze on households, the strength of employment was “one reason to be optimistic that the slowdown in spending won’t be too severe”.
A forecast earlier this week from the EY ITEM Club – which uses Treasury economic models – predicted that unemployment would rise to more than 5% next year as the UK’s growth slowdown begins to bite.
Gross domestic product grew by just 0.3% in the first quarter of this year.
A separate study by the Chartered Institute of Personnel and Development said employers expected to increase pay by just 1% in the coming year.