Turnaround in UK wage growth poses challenge for BOE and Starmer
NEW data on UK wages are raising awkward questions for both Bank of England governor Andrew Bailey and Prime Minister Keir Starmer.
Figures from Reed Recruitment reveal that a long-running decline in pay growth seen in its job postings halted and even started to reverse in recent months, hitting its highest level in 2024 during the three months to July.
The findings are a headache for Bailey and fellow rate-setters, who hailed signs of cooling wage growth when they cut rates from a 16-year high on Aug 1. Signs that employers are nudging pay higher again may feed into the official figures once those job openings are filled, forcing the BOE to take a cautious approach to reducing interest rates.
For Starmer, the figures show the challenge his newly elected Labour government faces to end crippling staff shortages that threaten its ambitious target to raise the UK growth rate to 2.5 per cent a year. Many firms are still having to offer significant pay bumps to attract workers.
“Our data shows that wage growth is happening in sectors with persistent skill shortages that also demand in-person attendance, such as construction, engineering, education and hospitality,” said James Reed, chief executive officer at Reed Recruitment.
“Whilst persistent wage inflation is not helpful for the BOE, it is symptomatic of a more profound structural problem which will be unhelpful for the new Labour government, given that it has prioritised economic growth,” he said. “The problem will be finding the workers to do the growing.”
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The figures, which track both hidden and public salaries put on job vacancies by employers, come a month after BOE policymakers narrowly backed the first rate reduction since the pandemic on hopes that persistent inflation was easing.
Growth in advertised salaries cooled over the course of 2023 after hitting a peak of 7.2 per cent when looking at a three-month average compared with a year earlier. It fell to as low as 3.3 per cent in February this year as the inflationary shock faded away. Since then there has been a string of consecutive increases that has pushed the figure to just under 4 per cent.
The official estimate for regular wage growth has not risen for 10 months, and was 5.4 per cent in the three months to June. However, the Reed data, a leading indicator of actual wage growth, does echo an acceleration noted by the BOE’s network of agents in their latest report to officials.
Reed’s data also suggest that wage bills in parts of the powerhouse services industry will continue to rise. Services inflation is being closely watched by the BOE for signs of domestic pressures, with prices in the sector rising by more than 5 per cent a year even as headlline inflation hovered at or around the 2 per cent target in recent months.
In some staff-starved sectors the growth in advertised salaries has been much faster, including the hospitality and catering industry where pay jumped over 30 per cent in the three months to July from a year earlier – the most of any sector. Wages in customer service were growing at over 9 per cent.
“Employers are currently struggling to find people to fill vacancies in sectors with acute skills shortages,” said Reed.
BOE policymakers are expected to hold rates at 5 per cent when they meet later this month but markets are betting on another reduction in November, and a 60 per cent chance of a further cut by the end of the year. Those expectations could be scaled back if official wage data start to deliver upside surprises.
James Smith, developed market economist at ING, said that high wage growth is “a key motivation for signaling a very gradual pace of rate cuts.” However, he said that the policymakers would “take some comfort” from Reed’s measure remaining below 4 per cent.
“The battle between the hawks and the doves now seems to be over the extent of so-called ‘catch-up’ in wage growth – basically the ability of workers to recoup their eroded real incomes over the past few years,” he said. BLOOMBERG
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