# More splinters, planks and myth busting

_Slowing private sector pay, mythical price gouging and a cost of living crisis that isn't – what yesterday's labour market data actually reveals._

Neil Woodford · 18 August 2026 · 4 min read

![Wood stacked up in a lumber mill.](https://cdn.sanity.io/images/v3acfbvo/production/09119aea62bd338457be16dfa9927332c1e0d4eb-3018x2012.jpg?w=1600&fit=max&auto=format)

---

Regular readers may recall that [I wasn’t Rachael Reeves’ greatest fan](https://www.noisecancelling.co/read/pre-budget-perspective). Whilst I expected spending and tax to rise under her stewardship, the magnitude of the increases was alarming. But what added insult to the substantial injury of the highest tax burden since World War II were the measures she introduced that directly and significantly increased inflation, such as raising the cost of employment by over £20bn (employers’ NI) and increasing bus fares and vehicle excise duty. Given that the government itself suffers disproportionately from higher inflation (higher debt costs, indexation of public sector wages and benefits), this was the definition of an economic own goal. _(Neil in the margin: Indexation means uprating payments in line with a price index like CPI. When inflation rises, the government's own benefit and pension bill mechanically rises with it — hence higher inflation hurts the state's finances directly.)_

**£20bn+** — Added to the annual cost of employment by the employers' NI rise

Thankfully, it does appear that the new Prime Minister may have learned from these economics 101 blunders, because since arriving in both No. 10s, Mr Burnham has introduced a couple of small measures that seem to have been aimed specifically at reducing the rate of inflation. Reversing the bus fare increase and temporarily taking VAT off electricity bills are both good examples. 

However, the Chancellor’s public food retailer lecture about mythical price gouging was the opposite. Instead, it was a transparent political sleight of hand to shift the cause of apparent cost-of-living pressures onto the private sector. As I highlighted in a recent note, not only do food retailers sell the cheapest automotive fuel in the country, but food prices have actually fallen so far in 2026.

_I set out the retail price evidence here:_ [Who is actually putting up prices?](https://www.noisecancelling.co/read/who-is-actually-putting-up-prices) — Food prices have fallen this year and supermarket forecourts sell the cheapest fuel in the country. Blaming the supermarkets for the cost of the Iran war is political deflection, if not outright dishonesty.

## The headlines, and what mattered underneath

I’m bringing this up again because of what yesterday’s labour market data revealed. The headlines focus on the unemployment rate, which is unchanged at 4.9%, and, to a lesser extent, the stable vacancy number and the slight fall in payrolled employment. 

_[Embedded media](https://www.ft.com/content/1e9a7365-ee1f-489c-9dea-39a6fc33837b?syn-25a6b1a6=1)_

What interested me, though, was data comparing wages and consumer price inflation since the pandemic, along with wage growth in the private and public sectors, which supports the point I have already made about the government’s role in creating inflation.

## Private pay is slowing. Public pay is not.

First, to the wage data. The good news is that private-sector regular pay growth fell further to 2.8% in Q2 2026. That compares with 4.8% a year earlier and provides a clear indication to those paying attention that underlying wage pressures have eased in the UK through 2026 and not increased as those hawks on the MPC forecast – the ghostly second round effects. So private sector workers are still seeing real wage growth, but at a significantly lower rate, reflecting weakening labour market conditions.  _(Neil in the margin: The Monetary Policy Committee — the Bank of England's nine-member rate-setting body. 'Hawks' are the members inclined to keep rates higher for longer to guard against inflation.)_ _(Neil in the margin: Second-round effects are when an initial price shock feeds into wage demands, which then push prices up again — a self-sustaining spiral. Hawks fear it; Neil's point is the wage data show no sign of it here.)_ _(Neil in the margin: 'Real' means after subtracting inflation. Pay of 2.8% still beats price rises, so purchasing power is edging up — the distinction between real and nominal is doing all the work in this argument.)_

So far so good. However, the news is not so good in the public sector, although wage pressures are expected to ease later in the year. Public sector wage growth was at 6.2% in Q2 2026, up from 5.3% a year ago. This acceleration takes public-sector wage growth in Q2 to more than 2x that in the private sector.

![Two pay markets, pulling apart](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chartDoc.splinters.private-public-pay-aug26-23858938c4f7-light.png)

_Two labour markets in one country. The private sector line has more than halved in a year. The one still climbing is set by the government itself._

## The plank in the government's own eye

So instead of lecturing Britain’s food retailers about mythical price gouging, the new Prime Minister and his shiny new Chancellor would be better served, when thinking about how to contain inflation, to focus on the government’s own decisions on public sector wages, which in relation to those in the private sector look somewhat out of control. 

Fortunately, the Bank of England has traditionally worried less about higher public sector wage growth because the public sector does not directly set commercial prices. However, these large above-inflation increases will, of course, put more pressure on public spending. My concern, and I expect the MPC’s too, is that if this gap between the two sectors persists, it could lead to broader unwelcome economic outcomes.

**6.2%** — Public sector regular pay growth in Q2 2026, up from 5.3% a year earlier

My summary of this data is that it is unequivocally good news. Slowing private-sector wage growth slays the MPC’s second-round effects myth and should be reflected in more emollient comments from the three hawks on the committee at the September meeting. I say should because I suspect the intellectual arrogance of their entrenched position will prevent a mea culpa.

## The cost of living myth

The final interesting myth-slaying data point that emerged from the labour market data this morning concerns the much-discussed cost-of-living pressures that appear to be preoccupying Mr Burnham on his tour around the country. What the ONS data shows is that since the pandemic (February 2020) consumer prices have increased by 31% in aggregate – on the face of it piling pressure on hard-pressed families.  _(Neil in the margin: The Office for National Statistics — the UK's official statistics agency, which produces the CPI and average-earnings figures Neil is setting against each other.)_ _(Neil in the margin: A cumulative figure over roughly six and a half years, not an annual rate — which is why setting it against the 38% earnings rise is the fair comparison rather than a scary standalone headline.)_

However, to put this properly in context, one must also look at what has happened to average earnings - over the same period (since Feb 2020), average earnings have increased by 38%, which by definition shows that cost of living pressures have eased over the last six and a half years. I wonder if Mr Burnham is paying attention?

![Earnings have outrun prices](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chartDoc.splinters.prices-vs-earnings-aug26-e741743a3959-light.png)

_Prices up 31%, pay up 38%. The gap is the story the cost of living narrative leaves out._

Once again, the popular political and media narrative, this time about the cost of living crisis, is wrong just as it is on [housing affordability](https://www.noisecancelling.co/read/slaying-popular-housing-myths) and on [income and wealth inequality](https://www.noisecancelling.co/read/when-small-men-begin-to-cast-big-shadows). It might be correct to suggest that Britain’s hard-pressed earners on above-average wages need a break from rising taxation. But, the claim that costs (represented by CPI) have risen faster than wages for average earners since the pandemic, who, by the way, have seen faster growth in post-tax than pre-tax earnings over this same period, is factually incorrect.

_Nothing here is a recommendation. The data and the policy read are offered as analysis of the macro environment, not as a basis for investment decisions._