A total of 9.38m people are now economically inactive – of working age but neither in work nor looking for work – with 2.82m of those long-term sick.

Tony Wilson, director of the Institute for Employment Studies, said: “Overall there are now 900,000 more people out of work than before the pandemic began, with virtually all of this due to higher economic inactivity.

“There appear to be three key reasons for this: fewer older people coming back to work, more young people in education or out of work, and more people off with long-term health conditions across all ages.”

Jeremy Hunt, the Chancellor, hailed the increase in pay. He said: “This is the 10th month in a row that wages have risen faster than inflation, which will help with the cost of living pressures on families.

“And while we are dealing with some challenges in our labour supply, including pandemic impacts, as our reforms on childcare, pensions tax reform and welfare come online I am confident we will start to increase the number of people in work.

It came as factory gate prices in the US rose by 0.5pc in April compared with a month earlier, higher than analysts had expected.

Prices charged at factory gates are seen as a leading indicator of inflation, fuelling concerns that interest rates could stay higher for longer. 

Ryan Brandham from Validus Risk Management said the figures were “continuing the recent theme of slower growth but higher prices”. 

Mr Brandham added: “Market anticipation of rate cuts has been building recently based on weaker-than-expected US labour market data, but if prices don’t follow suit, then rate-cut hopes will be dashed.”

Traders have had to temper hopes of rate cuts amid persistent inflation and are now only fully pricing in one. This is down from six at the start of the year.

Jerome Powell, chairman of the Federal Reserve, said on Tuesday that he believes inflation will continue to ease throughout the year.

However, he added: “I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year. [But] I would say my confidence in that is not as high as it was.”

Speaking at a banking event in Amsterdam he reiterated that despite senior banking figures suggesting another rate hike was possible, he believed this was unlikely. 

Mr Powell said: “It is more likely … we hold the policy rate where it is.”

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