UK wage growth hits record, worrying Bank of England.

UK wage growth hits record, worrying Bank of England.

Record Growth in Basic Wages Raises Inflation Concerns for Bank of England


LONDON, Aug 15 (ANBLE) – Basic wages in Britain have surged to hit a new record growth rate, according to the latest figures, raising concerns for the Bank of England about long-term inflation pressures. This comes despite 14 consecutive increases in interest rates.

Official data has also highlighted some cooling in the jobs market, with the unexpected rise in the unemployment rate to 4.2% from 4.0%, the highest level since the three months leading up to October 2021. However, the increase in basic earnings, which is the strongest in records dating back to 2001, has provided further impetus for Britain’s high rate of inflation, as many employers have resorted to increased pay offers to retain or attract staff.

Notably, annual pay growth including bonuses has also accelerated, reaching 8.2%, the fastest outside the coronavirus pandemic period when government job subsidies distorted the data. This significant surge in wages has resulted in a positive impact on the sterling, which rose against the dollar and the euro after the release of this data.

The wage data has led economists to believe that the Bank of England still has work to do in managing inflation pressures. Ruth Gregory, an economist at Capital Economics, suggests that these figures support the view that the Bank will raise interest rates from 5.25% to 5.50% in September. However, this decision will heavily depend on the next labor market release and two CPI inflation data releases.

If the current trend continues, pay growth in the UK is predicted to outpace consumer price inflation, which is forecasted to have slowed to 6.8% in July. This data is due to be released by the Office for National Statistics on Wednesday.

The markets are also reacting to these developments, with roughly a 55% chance of the Bank of England’s benchmark rates hitting 6% in early 2024, up from the current level of 5.25%. This is a significant increase compared to Monday’s estimate, where the chance of rates going that high stood at about one in three.

Governor Andrew Bailey has acknowledged that the rate of pay growth is “materially above” the central bank’s forecasts. However, the Bank of England has also indicated that it is getting closer to pausing its run of interest rate increases.

Despite the concerns about inflation, Governor Bailey and his colleagues may take comfort from certain signals indicating a cooling in the labor market. In addition to the surprise rise in the unemployment rate, the number of people in employment has fallen by 66,000, and job vacancies have reached their lowest level since mid-2021, dropping by 66,000 on the quarter to 1.02 million.

Furthermore, inactivity due to long-term sickness has hit a new record high. This poses additional challenges for employers who are seeking to fill job vacancies and adds pressure on pay growth.

In conclusion, the surge in basic wages in Britain has raised concerns for the Bank of England as it grapples with long-term inflation pressures. Despite the positive impact on pay growth, increases in wages may further exacerbate inflation, requiring the Bank to consider raising interest rates in order to maintain stability. As the labor market shows signs of cooling, the Bank of England will closely monitor the situation before making any decisions.