The number of unemployed people in Britain dropped to a nearly five-decade low in the first three months of this year, official data showed Tuesday.

But soaring inflation has led to the biggest annual fall in real earnings for most workers since 2013.

The jobless rate dropped to 3.8% through the end of March and the number of people out of work was less than job vacancies on offer for the first time on record, the Office for National Statistics (ONS) said in a statement.

That was the lowest level since 1974 and was compared with a rate of 3.8% in the quarter to the end of February.

"Despite a slowdown in growth this March, the U.K.’s labor market remains red-hot with record vacancies and job-to-job moves," the Confederation of British Industry’s director for people and skills, Matthew Percival, said.

The Bank of England (BoE) is watching the strength of Britain’s labor market warily, as it fears that higher-than-normal pay growth is a key channel through which the current energy-driven surge in inflation might become entrenched.

Consumer price inflation was 7% in March and official figures due on Wednesday are expected to show it hit 9.1% in April when a 54% rise in energy tariffs took effect.

The BoE expects further price rises will push the economy close to a recession by the end of the year, pushing up unemployment.

Tuesday’s data showed soaring pay in some sectors – with total pay up a record 9.9% in March alone – but the rewards from a tight labor market are unevenly distributed.

Bankers and builders are doing especially well, while public-sector workers face the biggest pay squeeze.

Total pay in the first quarter was up 7% from a year earlier, far above economists’ average forecast of a 5.4% rise as companies resorted to bonuses to attract or keep staff. Regular pay rose only slightly more than expected, up 4.2%.

Adjusted for inflation, basic pay was 2% lower than a year ago, the biggest fall since the three months to September 2013.

The ONS said wages continued to sink in real terms as Britain, like other countries, faces runaway inflation.

"There continued to be a mixed picture for the labor market," said Darren Morgan, ONS director of economic statistics.

Governor Andrew Bailey has said a fall in living standards is inevitable due to the energy price shock, and that a widespread push for higher pay would disproportionately benefit workers who were already in a strong position in the job market.

The uneven nature of wage gains should give the BoE pause for thought about raising interest rates, which financial markets expect to reach 2%-2.25% by the end of the year, Pantheon Macroeconomics’s Samuel Tombs said.

"These numbers shouldn’t make the MPC (Monetary Policy Committee) panic about wage growth," he said.

"Indeed, with the latest fall in unemployment to its lowest rate since 1974, there were actually fewer unemployed people than job vacancies for the first time since records began," Morgan said.

While companies struggle to fill posts after the pandemic caused people to change careers, Morgan noted that since the outbreak of COVID-19, about half a million more people in the U.K. "have completely disengaged from the labor market."

For those employed, regular earnings excluding bonuses were "falling sharply in real terms," he added.

The labor market's strength comes despite the economy stagnating in February and March.

The number of people at work rose by 83,000 in the first quarter of the year but is 444,000 below its level before the COVID-19 pandemic, largely reflecting increased long-term sickness and early retirement.

However, Tuesday’s data brought tentative signs this may be starting to reverse, with the largest number of people moving from "inactivity" to work since these records began in 2001.