UK
Wage surge raises prospect of further interest rate hike


Dearbail Jordan - Business reporter, BBC News
Tue, August 15, 2023

Office workers

Wages grew at a record annual pace in the April to June period, according to new official figures.

Regular pay rose by 7.8%, the highest annual growth rate since comparable records began in 2001.

The stronger-than-expected increase has fuelled forecasts the Bank of England will be forced to raise interest rates again to calm inflation.

Inflation - which measures the rate at which prices rise - has eased but remains high at 7.9%.

Darren Morgan, director of economic statistics at the Office for National Statistics, which released the wage and employment data, said the latest figures suggested real pay growth, which takes into account the rate of inflation, is "recovering".

Prime Minister Rishi Sunak said there was "light at the end of the tunnel" for the millions struggling with the cost of living.

However, wage growth is not quite outstripping the pace of price rises. Mr Morgan told the BBC's Today programme that real pay growth was "still falling a little", dropping by 0.6%.

Labour's shadow work and pensions secretary Jonathan Ashworth said: "These figures confirm once again that the Tories are failing working people and businesses across Britain."

New inflation figures are due out on Wednesday and analysts expect them to show price growth slowed again during July to between 6.7% and 7%.

However, that remains far higher than the Bank of England's target to keep inflation at 2%. Stronger wages will stoke concerns that price rises will take longer to ease.

Sushil Wadhwani, a former member of the Bank's rate-setting Monetary Policy Committee, said financial markets were projecting that an interest rate rise at the next meeting in September was a "virtual certainty".

Markets are also forecasting that interest rates could now peak at 6% from 5.25% currently. Just a few days ago, rates were expected to peak at around 5.75%.

Mr Wadhwani, who serves on the chancellor's Economic Advisory Council, said: "The key thing is how much does the Bank need to encourage the process by raising interest rates further and I would argue that today's news is disappointing in the sense that it implies that the Bank has more work to do."

There are signs in the ONS's data that the UK jobs market is weakening. The unemployment rate rose from 4% to 4.2%, while the number of people in jobs ticked lower.

"The fall in employment in the three months to June and further rise in the unemployment rate will be welcomed by the Bank of England as a sign labour market conditions are cooling," said Ruth Gregory, deputy chief UK economist at Capital Economics.

However, she added, given that wage growth is still accelerating, she expects the Bank of England to increase its key interest rate again to 5.5%.

Commenting on another potential rise in interest rates, Mr Sunak said it was a matter for the Bank. But he added: "The best way to be able to bring interest rates down and stop them going up is to bring inflation down."

Chart showing wage growth and prices growth

Annual average pay growth in the private sector continued to outpace the public sector at 8.2%. Wages in the public sector grew at an annual pace of 6.2% between April and June.

The number of vacancies in the UK jobs market fell again, down 66,000 between May and July. However, there are still more than one million vacancies.

Finding enough people to fill vacancies is one of the biggest business barriers facing Candice Mason, the owner of Masons Minibus & Coach Hire in Hertfordshire.

"It is just dire," she told the Today programme. "It is not just me, it is every operator that I speak to, we just cannot recruit and staff our companies properly."

Ms Mason said the company had increased its wages to fill shifts left by employees who, following Covid lockdowns, decided they wanted a better work-life balance and therefore are working fewer days.

"But, of course, that created a bigger gap of needing to recruit anyway," she said. "It honestly has just been relentless since we came out of lockdown. It is the most difficult part of the business at the moment."
Triple lock

The wage figures are likely to intensify political debate over next year's rise in the state pension, which is governed by the so-called triple lock.

Government policy means the state pension rises the following April in line with either average wage growth, the inflation rate or 2.5% - whichever is higher.

It is based on wage growth between May and July, which the ONS will release next month. The inflation figure for August is also used to decide pension payments. This is released in September.

The latest set of figures signal that wage growth remains relatively high and rising. That is likely to prompt discussion over the potential increase in the state pension, and the allocation of government spending.

Pensioner groups say the state pension remains relatively low compared with some other countries.

The employment data also showed that the rate of those considered economically inactive edged lower to 20.9% between April and July.

Economically inactive people are those aged between 16 and 64 who are not looking for work.

Numbers swelled during the Covid pandemic. The ONS said on Tuesday that the number of people who were inactive because of long-term sickness had increased to a record high of 464,225.

But the overall rate dipped because more people shifted out of being economically inactive and into unemployment.

These are people who have been searching for work over the past four weeks or are available to start a job within the next fortnight.