UK posts record wage growth even as job market cools
UK WAGE growth held at a record high in the three months through July, a sign of persistent inflation that will keep pressure on the Bank of England to raise interest rates again.
Average earnings excluding bonuses rose 7.8 per cent from a year earlier, maintaining the fastest pace since the series began in 2001, the Office for National Statistics said on Tuesday (Sep 12). The reading was expected by economists in a Bloomberg survey. Total wage growth accelerated unexpectedly to 8.5 per cent, a record aside from the period during the pandemic.
The figure came despite signs that the labour market is starting to cool in response to the squeeze being inflicted by the highest borrowing costs since 2008. Unemployment ticked higher for a third month to 4.3 per cent, and vacancies continued to fall. However, that’s unlikely to stop the BOE delivering a 15th consecutive rate increase later this month as it battles to get a grip on above-target inflation.
Money markets are pricing in a quarter-point hike to 5.5 per cent and see a more-than 50 per cent chance of a further rise by the end of the year. They then expect rates to remain on hold for much of 2024, a view recently endorsed by BOE chief economist Huw Pill who said he favoured a “Table Mountain” path for rates, where they remain elevated for some time.
“Despite clear signs of weakening momentum, we still expect the Bank of England to raise interest rates by 25 basis points next week,” said Yael Selfin, chief economist at KPMG UK. “The threshold for further increases may be hard to meet given the current economic outlook.”
“The year on year rise in average weekly earnings will be a headache for the BOE and lends support to the hawkish members of the committee,” said Janet Mui, head of market analysis at RBC Brewin Dolphin in London. Sterling’s reaction is likely to be positive initially, but unlikely to last given concerns will shift back to recession risks, she said.
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Strong divisions have emerged at the central bank about how to respond to inflation. BOE Governor Andrew Bailey suggested the BOE is nearing an end to its quickest series of rate hikes in more than three decades. However, fellow policy Catherine Mann on Monday revealed potential splits on the Monetary Policy Committee when she urged officials to “err on the side of tightening further” to prevent elevated inflation from taking root.
The focus will now turn inflation data next week. The BOE is forecasting a temporary uptick to 7.1 per cent in August before price growth resumes its decline toward the 2 per cent target.
High wage growth poses another problem for Chancellor of the Exchequer Jeremy Hunt as he tries to create room for tax cuts for a general election expected next year.
Hunt said the UK needs to focus on fighting inflation.
“It’s heartening to see the number of employees on payroll is still close to record highs and that our unemployment rate remains below many of our international peers,” Hunt said. “Wage growth remains high, partly reflecting one-off payments to public sector workers, but for real wages to grow sustainably we must stick to our plan to halve inflation.”
There were also tentative signs of a turning point in private sector wages, which are being closely watched by the BOE. Regular private sector pay grew by 8.1 per cent, a slight easing.
“Earnings in cash terms continue to increase, at a record rate outside the pandemic-affected period,” Darren Morgan, ONS director of economic statistics, said. “Coupled with lower inflation, this means people’s real pay is no longer falling.”
The pressure on household finances from rampant price growth finally started to ease with the first real wage growth in 16 months. Real total pay rose 0.6 per cent in the three months to July compared with a year earlier.
The BOE expects unemployment to rise steadily to 5 per cent by 2026, but a key question is how far it has to rise before the labour market is cool enough to take the heat out of wages, which have been bid up by workers to trying to keep up with the rising cost of living. Bloomberg Economics thinks that rate is higher than the 4.25 per cent currently assumed by the BOE.
Labour shortages have given workers unprecedented bargaining power, though there are signs of that many people are now returning to the labour market.
The economy lost a further 281,000 working days to strikes in July, taking the total over the past 12 months to 4.2 million – the most since 1989-90. Controversial strike rules became law in July that will force some employees to work during industrial action or be fired, enraging labour unions that have vowed to challenge them.
The labour market appeared to weaken again, with vacancies falling below 1 million for the first time since August 2021 and employment plunging 207,000 in the three months to July compared with the previous three months – the biggest dip between months since October 2020.
Unemployment rose by 159,000 to 1.46 million, and total hours worked dropped below pre-Covid levels again. Private sector regular wages, which the Bank of England is watching for signs of persistent inflation, dipped from 8.2 per cent to 8.1 per cent.
However, inactivity increased for a second month running and is now 410,000 higher than before the pandemic. The increase was driven by another rise in long term sickness among the working aged to 2.6 million and a sharp rise in student numbers. BLOOMBERG
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