The VocaLink take home pay index has fallen dramatically in December to just 2.9%, the weakest increase since January 2008. Overall the average wage growth in 2008 rose by just 3.7% and for the second consecutive year the increase in retail prices has exceeded growth of take home pay. Prior to this inflation had not exceeded wage growth since 1995. The result of this trend is that the spending power of take home pay has fallen by over 1.0% on average over the last two years, forcing individuals to borrow or dip into savings in order to maintain their standard of living.

Take home pay growth in December declined as a result of a sharp fall in service sector pay, decreasing from 3.9% to 3.0%. This is the largest fall in the sub-index for 12 months and reflects low Christmas bonus payments as companies, under pressure from the declining economy, reign in on discretionary spending. The manufacturing sector, however, edged up 0.1% to 2.4%, the first increase following four consecutive monthly falls.

Richard Cooper, marketing director at VocaLink, said, "Take home pay growth in 2008 remained weak following a difficult year for the economy. It is likely to continue to struggle in 2009 given that the recession will deepen and unemployment is set to rise. However, falling inflation will help to boost consumer spending power, so we expect take home pay growth to outpace the growth in retail prices once more."

Commenting on the latest VocaLink take home pay index, Douglas McWilliams, chief executive of economics consultancy cebr, said, "The Bank of England delivered a further 100 basis point interest cut in December, taking the base rate to 2.0%. With the economic crisis set to worsen, as indicated by the VocaLink take home pay index, and high inflation no longer an issue, we are almost certain to see interest rates hit record lows in 2009."

VocaLink processes over 90% of UK salaries and the VocaLink take home pay index, established in 2005, is the most timely and accurate disposable income data available in the UK. It is based on actual payments made to employees on a three-month moving average compared with the same measure a year earlier. It is affected by changes in tax rates, National Insurance and other employer payments or deductions.