Interest rate dilemma for Bank of England as wages outstrip price rises
Workers’ pay continues to grow faster than the rate of price rises.
Annual growth in earnings excluding bonuses was 6.6 per cent in the three months to November, according to the Office for National Statistics (ONS), slowing slightly from 6.9% in the quarter before.
The Consumer Prices Index inflation rate for November was 3.9%.
Including bonuses, the quarterly rise in average earnings was 6.5 per cent, down from an 8.5 per cent peak last year and compared with 7.2 per cent in the three months to October.
The Bank of England is keeping a close eye on wage growth due to fears that domestic-driven inflation could remain sticky, despite easing energy and food price rises, if workers are still able to command higher pay, and employers pass on those costs.
The Bank will be concerned that wages are outstripping price rises, and some rate setters have expressed caution that an interest rate cut could fuel inflation, which is still almost double the Bank’s 2 per cent target.
Hotels and restaurants saw the largest growth in annual pay for the period, followed by the finance and manufacturing sectors.
Total pay, adjusted for inflation, rose by 1.3 per cent in the three months to November, unchanged from the previous three-month period.
Real pay growth has only returned in recent months, helping to ease the impact of rising interest rates on household finances.
Chancellor Jeremy Hunt said that with inflation falling it was “heartening to see real wages growing for the fifth month in a row”.
The number of job vacancies fell by 49,000 over the three months to December, to 934,000, marking the 18th period in a row that openings have reduced, the longest decline ever recorded.
The unemployment rate held steady at 4.2 per cent in November.
Liz McKeown, of the ONS, said: “While annual pay growth remains high in cash terms, we continue to see signs that wage pressures might be easing overall. However, with inflation still falling more quickly, earnings continued to grow in real terms.
“The overall picture continues to be broadly stable, with the unemployment rate unchanged and the employment rate up slightly on the previous three months.
“Job vacancies fell again, with the retail area seeing the biggest fall. However, the overall number of vacancies still remains above its pre-pandemic level.
The pound dipped slightly after easing wage pressure supported markets belief the Bank will cut interest rates sharply this year.
“Signs that the labour market is gradually normalising will reinforce the view that rate cuts could come as early as May,” said Jake Finney, economist at PwC UK.
Yael Selfin, chief economist at accountancy firm KPMG UK, said slowing pay growth signalled “further weakness for labour market ahead”.
“The unique circumstances which fuelled pay growth, including strong demand for workers and higher pay demands to keep pace with the sharp rise in the cost of living, have receded in recent months,” she said.
Matthew Percival, of the Confederation of British Industry (CBI) said: “While there continue to be signs that the labour market is softening, it is happening slowly.
“The data confirms that many businesses are still struggling to hire the people that they need, leading to higher employment costs that are putting pressure on prices.
“Difficulties hiring staff is still a drag on investment as firms redeploy funds to meet the short-term imperative of attracting the people they need, rather than prioritising long-term investment.”
The ONS found 69,000 working days lost because of strikes and labour disputes across the UK in November – the lowest since May 2022. Fewer NHS staff striking was behind the drop, the ONS said.
