UK wage growth accelerated at the strongest pace on record, underscoring the Bank of England’s concerns that it hasn’t yet broken the wage-price spiral feeding inflation across the economy.
(Bloomberg) — UK wage growth accelerated at the strongest pace on record, underscoring the Bank of England’s concerns that it hasn’t yet broken the wage-price spiral feeding inflation across the economy.
Average pay excluding bonuses rose 7.8% 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%, which was also revised up, the Office for National Statistics said Tuesday. Economists had expected a figure of 7.4%.
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.
“It very much leaves the BOE facing the conclusion that it may yet be forced to engineer a recession in order to finally get the inflation genie back in the bottle,” said Stuart Cole, chief macro economist at Equiti Capital in London.
The pound extended gains after the release as traders bet the BOE will have to tighten policy further. The market fully priced a quarter-point increase next month and an additional 50 basis points of tightening through March, which would take the BOE’s base rate to 6%.
The report marks the first of four separate economic data releases that will guide the BOE’s next rate decision on Sept. 21. 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%, the lowest since the start of last year but still more than triple the BOE’s 2% target. Policy makers get another batch of jobs and inflation data next month.
“Wage inflation shows no sign of abating,” said Roger Barker, director of policy at the Institute of Directors, which represents company executives. “The concern for business is that this may feed into the persistence of stubbornly high rates of inflation and high interest rates.”
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High wage growth poses another problem for Chancellor of the Exchequer Jeremy Hunt as he tries to create headroom for tax cuts and other giveaways before the election expected next year. Under the so-called “triple-lock,” state pensions must rise by the higher of wage growth, inflation or 2.5%.
Falling inflation as energy prices decline offered the prospect of some extra headroom by keeping a lid on the escalating welfare bill, which is already forecast to breach the government’s own rules. Rising wages threaten to keep driving up pension costs, limiting his scope for pre-election sweeteners.
“Our ambitious reforms will make work pay and help even more people into work – including by expanding free childcare next year – helping to deliver on our priority to grow the economy,” Hunt said in a statement.
What Bloomberg Economics Says …
“The stronger-than-expected wage growth print in the latest batch of jobs data will help reinforce the Bank of England’s concerns about the persistence of inflation in the UK. With the labor market only cooling at a gradual pace and core CPI inflation proving sticky, our view is that the BOE isn’t done hiking yet. We expect rates to rise in September and November to a peak of 5.75%.”
—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.
The ONS report on jobs published Tuesday showed further signs that the labor market is loosening.
- Unemployment rose to 4.2% in the three months through June, the highest since July 2021 and up from as little as 3.5% 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%.
- 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 labor 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 cooling in labor market conditions didn’t feed through into an easing in wage growth,” said Ruth Gregory, deputy chief economist at Capital Economics. “This suggests the Bank of England has a bit more work to do and supports our view that the Bank will raise rates from 5.25% to 5.50% in September. A lot will depend on the next labor market release and two CPI inflation data releases.”
The main factor driving the labor 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% 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 latest data doesn’t include more recent settlements with nurses and teachers.
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.
While wages across the board were rising, there were signs of widening inequality at a time when vast swathes of the public sector have been embroiled in strikes.
The one silver lining in the report was that squeeze on living standards is starting to ease by one measure. Regular pay after adjusting for inflation shrank 0.6%, one of the smallest declines since the start of the inflation shock during the pandemic. The last time workers kept more of their pay after inflation was from September to November 2021.
“Record wage growth is being driven by finance and business services sector,” said Ben Harrison, director of the Work Foundation at Lancaster University. “The cost of living crisis is far from over for the majority of workers.”
–With assistance from Alex Mortimer, Eamon Akil Farhat, Aline Oyamada, James Hirai and Vassilis Karamanis.
(Updates with comment and detail from the report from the fourth paragraph.)
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