The UK basic wage growth has reached a new record high, posing challenges for the Bank of England amid concerns about long-term inflation pressures
Despite 14 consecutive interest rate hikes, basic wage growth earnings surged by 7.8%, the sharpest increase since records began in 2001. This uptick in pay has contributed to the UK’s elevated inflation rate, as employers respond by offering higher wages to attract and retain employees.
Rising unemployment rate and inflation pressure
Contrary to expectations, the unemployment rate unexpectedly rose to 4.2%, its highest level since October 2021. This increase has occurred at a quicker pace than anticipated by the Bank of England (BoE).
unemployment rate rose to 4.2%
Simultaneously, the annual pay growth, including bonuses, accelerated to 8.2%, marking the fastest growth outside the distortions caused by the pandemic period’s government job subsidies.
Market reaction and future projections for the British government
Following the release of the data, the sterling strengthened against the dollar and euro, and two-year British government bond yields reached their highest level in a month.
Despite these developments, economists foresee a slowdown in wage increases during the latter half of 2023.
While Samuel Tombs, an economist at Pantheon Macroeconomics, believes basic wage growth momentum remains strong, he anticipates the BoE’s Monetary Policy Committee will enact another rate hike, pushing rates to 5.5%.
Potential overtake of inflation rate
The trajectory of pay growth suggests it may surpass the projected consumer price inflation rate, which will be expected to have decelerated to 6.8% in July. Financial markets indicate a roughly 55% probability that the BoE’s benchmark rates will reach 6% by early 2024, up from the current level of 5.25%.
Mixed signals and concerns for basic wage growth
While Governor Andrew Bailey acknowledged the basic wage growth exceeding the BoE’s forecasts, the central bank is considering pausing its interest rate hikes. Despite the robust wage figures, other labor market indicators raise concerns.
Employment numbers declined by 66,000, and job vacancies hit their lowest point since mid-2021, dropping by 66,000 to 1.02 million.
Additionally, experimental payroll data indicates a notable decrease in pay growth for July. Furthermore, a surge in inactivity due to long-term sickness poses challenges for filling job vacancies and adds pressure to pay increases.
The remarkable surge in basic wage growth
The remarkable surge in UK basic wage growth, reaching record highs, has set off alarms at the Bank of England due to concerns over inflation and economic stability.
While the BoE navigates the complex landscape of wage dynamics and market reactions, the future remains uncertain, with various indicators signaling potential opportunities and challenges for the UK’s economic outlook.
