PAY packets are shrinking at their fastest rate on record, according to new official figures, as modest salary rises are overtaken by soaring inflation.

The Office for National Statistics reported regular pay, which excludes bonuses, fell by 3.7 per cent in real terms in the three months to May.

It was the biggest slump since comparable records began in March 2001 

UK ministers will announce pay rise plans for 2.5million public sector workers later today. 

Although regular pay rose by 4.3% between March and May, the increase was more than offset by CPI inflation hitting a 40-year high of 9.1% in May. 

Inflation is expected to hit 11% later this year.

Living costs have surged due to soaring energy and fuel bills amid the impact of the war in Ukraine, and many workers have seen wages struggle to keep up.

The ONS said total pay including bonuses lifted by 6.2% for the three-month period, as workers in the financial sector drove a rise in bonuses.

There was a stark difference in the levels of pay for workers in the private and public sectors.

Average total pay including bonuses in the private sector grew by 7.2% over the quarter, while public sector workers saw a 1.5% increase in total pay after a series of pay freezes.

Publication of the pay data coincided with the release of ONS labour market figures.

Across the UK, the number of workers on payrolls rose by 31,000 from May to June to 29.6m while the unemployment fell 0.1 points to 3.8% for March to May.

In Scotland, the unemployment rate rose 0.1 points to 3.5% for those aged 16 to 64.

The employment rate rose by 0.6 points to 75.4% in Scotland in the three months to May, slightly behind the 75.9% seen UK-wide after a 0.4 point quarterly rise.

There were 1,294,000 job vacancies over the three months to June across the UK, a rise of 6,900 on the previous quarter.

In Scotland, there were 2,423,000 employees were in payrolled jobs – up 72,000 on the same period last year where 2,351,000 were on payrolls.

Benefit claims in Scotland decreased in June 2022 with figures showing 110,600 claims for universal credit and jobseekers allowance – a decrease of 4,400 on the previous month.

Median monthly wages were up 5.6% in Scotland to £2,126 in June, compared to just under £2000 per month on the same period last year.

SNP Public Finance Minister Tom Arthur said the employment rate rising was a sign of “resilience” in the Scottish economy

He said: “While today’s figures continue to show recovery in Scotland’s labour market, Scotland continues to face economic challenges with the rising cost of living, the continued impact of Brexit and recovery from the effects of the pandemic and the economic consequences of Russia’s illegal invasion of Ukraine.

“The Scottish Government is firmly focused on delivering the ambitious National Strategy for Economic Transformation which will help build an economy of secure, sustainable and satisfying jobs. A key part of this strategy is to provide people with the skills they need to gain new opportunities and ensure new and current businesses are supported in investing in innovative ideas that could lead to new industries and quality jobs across the country.”

 Scottish Secretary Alister Jack added: “Today’s figures show Scotland’s labour market remains strong, with an increasing number of people on the payroll and unemployment at low levels. It's also great to see more women in work, with two million more women across the UK in paid work than in 2010.

“As we continue to focus on growing our economy and levelling up opportunities across the country, we're helping as many people as possible onto the jobs ladder, as having a secure and stable income is one of the best ways to get on. Our Jobcentres and work coaches stand ready to provide support, while our £37bn package to assist families with the cost of living is giving extra financial assistance to those who need it most.”

ONS head of labour market and household statistics David Freeman said: “Today’s figures continue to suggest a mixed picture for the labour market.

“The number of people in employment remains below pre-pandemic levels and, while the number of people neither working nor looking for a job is now falling, it remains well up on where it was before Covid-19 struck.

“With demand for labour clearly still very high, unemployment fell again, employment rose and there was another record low for redundancies.

“Following recent increases in inflation, pay is now clearly falling in real terms, both including and excluding bonuses.”

Chancellor Nadhim Zahawi said: “I am acutely aware that rising prices are affecting how far people’s hard-earned income goes, so we are providing help for households through cash grants and tax cuts.

“We’re working alongside the Bank of England to bear down on inflation, providing support worth £37 billion this financial year for the cost of living, and investing in skills to help people get into work and progress.”

Labour’s Pat McFadden, shadow chief secretary to the Treasury, said: “Today’s record fall in real wages comes after a decade where wages have stagnated for workers across the economy.

“This is because the Conservatives have failed to grow the economy, which has left people more exposed to inflation and the cost-of-living crisis.

“Labour’s number one mission in government would be to grow our economy, making the country more prosperous and making its people better off.”

James Reed, chairman of Reed, one of the UK's largest recruitment businesses, said the UK was seeing "a two-speed workforce", with big pay offers being made to people with certain skills.

"So you might be seeing 25% plus pay offer increases to get people to move jobs. But then we're seeing other parts of the economy where pay hasn't moved much at all and that is concerning because more and more people will end up living in in-work poverty," he told the BBC's Today programme.

Virgin Money is the latest company to offer a one-off payment to help employees cope with the rising cost of living, with all staff on a salary of £50,000 or less to get a £1,000 lump sum in August. Firms including Lloyds Bank have also offered similar payments.

Laith Khalaf, head of investments analysis at AJ Bell, said the latest ONS figures meant it was no surprise that “businesses are willing to cough up more to get new staff and keep existing employees on the books”.

He added: “The number of vacancies fell very slightly on the last reading, which means we may have just crested off the back of the peak and could start to see some normalisation of the labour market.

“But the big concern is that the higher wages paid by the private sector will serve to entrench inflation, while the small pay rises witnessed in the public sector in the face of soaring prices will continue to stoke industrial tensions.”