Average pay now growing faster than inflation, reinforcing Bank of England’s concerns’
UK wages grew at the fastest pace on record in the three months to July, despite a weaker jobs market in which unemployment rose and hiring slowed, official data showed on Tuesday.
The Office for National Statistics said annual growth in average pay, excluding bonuses, remained at 7.8 per cent — the highest rate since comparable records began in 2001.
Total pay grew 8.5 per cent, boosted by one-off payments to NHS workers and civil servants following pay deals to end strike action.
Average wages are now growing faster than consumer prices, which rose 6.8 per cent in the year to July — a development that will relieve households but is likely to reinforce the Bank of England’s concerns over the persistence of inflationary pressures.
“The challenge right now . . . is that wages are high and are rising and there is a real risk that the second-round effects mean that this inflation becomes embedded,” Sarah Breeden, the BoE’s incoming deputy governor for financial stability, said on Tuesday.
Speaking to the House of Commons Treasury select committee, Breeden said she would focus on such risks but added: “It is not our intent to cause a recession.”
Rate-setters hope wage growth will soon slacken as the labour market cools, with Tuesday’s data showing a fall in employment as well as a rise in unemployment.
The pound slid 0.4 per cent to trade at $1.2464 in the aftermath of Tuesday’s figures, while two-year gilt yields, which move in line with interest rate expectations, edged down 0.04 percentage points to 5.03 per cent.
Investors expect the BoE to increase rates by 0.25 percentage points next week to 5.5 per cent, with a market-implied probability of close to 80 per cent. But traders are evenly split on the chances of one further rate increase later in the year.
Samuel Tombs, economist at the consultancy Pantheon Macroeconomics, said the UK’s persistently high wage growth probably meant the BoE probably “can’t stop raising the bank rate at next week’s meeting, but the end of the tightening cycle is not far off now”.
He added that, with vacancies now below 1mn, the ratio of unemployed people to vacant jobs — a measure of labour market slack — had almost returned to its average level in 2019, before the disruption of the Covid-19 pandemic.
The ONS said the unemployment rate rose to 4.3 per cent in the three months to July, up from 4.2 per cent last month and above the BoE’s latest forecast of 4.1 per cent for the third quarter.
Employment fell more sharply than analysts had expected, down by 207,000 from the previous three-month period, following a drop of 66,000 in last month’s data.
The proportion of people who are economically inactive also rose by 0.1 percentage points over the quarter to 21.1 per cent.
“Too many people are outside the labour force entirely, but those that are looking for work are finding it harder to get it,” said Tony Wilson, director of the Institute for Employment Studies, a consultancy. He noted that the drop in employment was the sharpest since 2020, with a big, unexplained increase in the number of young people neither working nor studying.
Paul Nowak, general secretary of the Trades Union Congress, said the figures showed the UK economy was “in the danger zone”, with unemployment up almost 250,000 over the past year and real wages still falling in many sectors. “The government is in denial,” he added.
But Jeremy Hunt, the chancellor, said it was “heartening” that UK unemployment remained “below many of our international peers”, adding: “For real wages to grow sustainably, we must stick to our plan to halve inflation.”
The 8.5 per cent increase in total pay in the three months to July may also serve as the benchmark for next year’s increase in the state pension because of ministers’ commitment to maintain the “triple lock” that ensures payments rise each year in line with the highest out of inflation, average earnings or 2.5 per cent.
Jonathan Cribb, associate director at the Institute for Fiscal Studies think-tank, said this would add £2bn to spending on the state pension in 2024-25, relative to the Office for Budget Responsibility’s March forecasts.
