UK wages grow at record pace, adding to BOE’s inflation concerns
UK WAGE growth accelerated to the strongest pace on record, adding to concerns that a tight labour market is feeding inflationary pressures.
Average earnings excluding bonuses rose 7.8 per cent in the three months through June compared with a year ago. That was the highest since records began in 2001 and up from the previous reading of 7.5 per cent, which was also revised up, the Office for National Statistics (ONS) said on Tuesday (Aug 15). Economists had expected a figure of 7.4 per cent.
The Bank of England is worried that soaring pay is pushing up prices across the economy. Policy-makers led by Governor Andrew Bailey have said further signs that those pressures are persisting could result in another increase in interest rates. The pound extended gains after the release, rising as much as 0.3 per cent to US$1.2721.
The figures are the first of two batches of economic data that will guide the BOE’s next rate decision on Sept 21. Investors have almost fully priced in a quarter-point increase in the UK central bank’s key rate to 5.5 per cent, which would be the highest since early 2008. But the risk of a bigger hike next month has subsided after a drop in the headline inflation rate reported last month.
Economists expect UK inflation will fall again on Wednesday when July’s data is released. The Consumer Prices Index is forecast to slide to 6.7 per cent, the lowest since the start of last year but still more than triple the BOE’s 2 per cent target.
The ONS report on jobs published on Tuesday showed further signs that the labour market is loosening.
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- Unemployment rose to 4.2 per cent in the three months through June, the highest since July 2021 and up from as little as 3.5 per cent in August 2022.
- More people returned to the jobs market, reducing the inactivity rate by 0.1 of a percentage point in the latest quarter to 20.9 per cent.
- Vacancies fell by 66,000 to just over 1 million, the 13th consecutive decline.
- Employment – the number of people in work – fell by 66,000 in the quarter through June, the biggest decline since August.
Even so, the labour market remains tight by historical standards and is forcing companies to bid up wages to attract and retain staff. The UK also suffered the most strikes since the 1980s, as workers walked off the job in search of higher pay.
The main factor driving the labour market is a shortage of workers. Tuesday’s figures show 144,000 fewer people in employment than before the pandemic, leaving the economy little room to grow without sparking inflation.
Including bonus payments, total pay grew 8.2 per cent in the quarter through June, the strongest on record except for the period distorted by the pandemic. The previous month’s figures also were revised up. One-time payments to workers in the National Health Service drove the increase.
The increase will fuel concerns about inflation as the BOE is closely following developments in private sector pay. BOE Governor Andrew Bailey has said policy makers could raise rates again if more signs of persistent inflation emerge, and that the labor market is their biggest concern.
The fall in the inactivity rate was largely attributed to more 50-64-year-olds – who retired in droves during the pandemic – coming back to the workforce. But the number of people who said they were out of work due to long-term sickness still rose to a record. BLOOMBERG
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