In the period from April to June, there has been a significant upsurge in wage growth, as indicated by recently released official data. The rate of regular pay has surged by 7.8%, marking the highest annual growth rate since records of this nature commenced in 2001. This unexpectedly robust increase is generating predictions that the Bank of England might find itself compelled to initiate another round of interest rate hikes in order to mitigate inflation. While inflation, a metric that gauges the rate of price escalation, has displayed some moderation, it still persists at a substantial 7.9%.
Darren Morgan, who serves as the director of economic statistics at the Office for National Statistics and has overseen the release of the wage and employment data, remarked that the latest statistics seem to point toward a resurgence in real pay growth, accounting for the inflation rate.
Prime Minister Rishi Sunak expressed a cautiously optimistic perspective, stating that there is a “light at the end of the tunnel” for the numerous individuals grappling with the challenges posed by the cost of living. However, it is noteworthy that wage growth is not yet surpassing the velocity of price upswings. Mr. Morgan elucidated that real pay growth is still encountering a minor decline, experiencing a drop of 0.6%.
The shadow work and pensions secretary for the Labour Party, Jonathan Ashworth, used these figures to reiterate his view that the Conservative government is failing to adequately support both the workforce and businesses throughout the UK.
Anticipations for new inflation data set to be unveiled on Wednesday point toward a further deceleration in price growth throughout July, with projections ranging from 6.7% to 7%. Yet, this level of inflation remains considerably above the Bank of England’s target of maintaining it at 2%. The strengthening of wages has provoked concerns that the trajectory of price surges might take a longer duration to subside.
Sushil Wadhwani, previously a member of the Bank’s Monetary Policy Committee responsible for rate-setting, emphasised that financial markets are increasingly anticipating an almost certain interest rate hike in the upcoming September meeting. Additionally, market forecasts are indicating that interest rates might peak at 6%, surpassing the current 5.25%. This marks a departure from earlier expectations that pegged the peak rate at around 5.75%. Mr. Wadhwani conveyed that this situation implies the Bank may need to resort to further interest rate hikes to steer the economic course.
Examining the data provided by the Office for National Statistics, signals emerge indicating a weakening UK job market. The unemployment rate has climbed from 4% to 4.2%, accompanied by a slight decrease in the number of individuals employed.
Ruth Gregory, the deputy chief UK economist at Capital Economics, noted that the fall in employment and the concurrent rise in the unemployment rate can be seen as an indication of the labor market cooling down. She further predicted that despite this, due to the ongoing acceleration in wage growth, the Bank of England might opt for yet another interest rate hike, potentially reaching 5.5%.
Reacting to the possibility of an additional interest rate increase, Prime Minister Sunak deferred the decision to the Bank, while emphasising the importance of curbing inflation for maintaining stable interest rates.
In the realm of pay growth, the private sector has managed to maintain its lead over the public sector, displaying an average growth rate of 8.2%. In comparison, the public sector witnessed an annual pace of growth at 6.2% during the April to June period.
Although the number of job vacancies in the UK has registered a decline of 66,000 between May and July, the total still remains well over one million. The challenge of filling these vacancies is a substantial concern for businesses, such as Masons Minibus & Coach Hire in Hertfordshire. The owner, Candice Mason, described the situation as “dire,” stressing the difficulty of recruiting and staffing their companies effectively. The company had raised wages in an attempt to cover shifts vacated by employees seeking better work-life balance post the Covid lockdowns.
The data also adds momentum to the ongoing political discourse surrounding the state pension’s annual increase, influenced by the triple lock policy. This policy dictates that the state pension is adjusted the following April in accordance with either average wage growth, the inflation rate, or a fixed 2.5%, selecting the highest among these figures.
The state pension adjustment relies on wage growth between May and July, to be released by the ONS next month. The inflation data for August, which will determine pension payments, is scheduled for release in September. Given the sustained high and ascending wage growth, this development is likely to fuel discussions regarding the forthcoming increase in state pension and the allocation of government resources.
Advocates for pensioners argue that the state pension in the UK remains comparatively low compared to some other countries.
Lastly, the employment data points to a slight reduction in the rate of individuals classified as economically inactive, now standing at 20.9% between April and July. These are individuals aged between 16 and 64 who are not actively seeking employment. The pandemic had led to an increase in this category, driven particularly by long-term sickness, which has reached a record high of 464,225. Nonetheless, the overall rate of inactivity has decreased due to the shift of some individuals from economic inactivity to unemployment. These individuals are those who have been actively searching for work in the past four weeks or are prepared to commence a job within the subsequent two weeks.