Wages outstrip inflation for first time in over a year
Workers’ wages outstripped the pace of inflation for the first time in over a year in July, helping ease the strain on households who have suffered from an erosion in their real pay.
Official statistics showed that average weekly earnings across the economy, when stripping out bonuses, rose by 7.8 per cent in the three months to July, in line with economists’ forecasts and matching the highest pace of wage growth recorded in 22 years.
The average earnings figure surpasses the headline rate of consumer price inflation recorded in July of 6.8 per cent and is the first time wage growth has come in higher than prices since October 2021.
When including bonuses, average earnings rose by 8.5 per cent, above forecasts of 8.2 per cent, and a figure that may be used to uprate state pensions if the government commits to its longstanding triple lock policy later this year. The Office for National Statistics said bonuses awarded to civil servants and NHS staff helped push up the figure in July.
Darren Morgan, director of statistics at the ONS, said: “Earnings in cash terms continue to increase at a record rate outside the pandemic-affected period. Coupled with lower inflation, this means people’s real pay is no longer falling.”
The ONS warned, however, that other parts of the UK’s labour market are beginning to slow under the weight of interest rate rises.
The unemployment rate edged up from 4.2 per cent to 4.3 per cent and there was a drop in the total number of employed people to 75.5 per cent from 76 per cent in the previous month. The total number of vacancies in the economy also dropped below the million mark to 989,000 and has declined for 14 consecutive months.
The figures will be closely watched by the ratesetters at the Bank of England, as markets begin to speculate that the central bank may pause its monetary tightening this month after 20 months of aggressive action to quell inflation.
Andrew Bailey, the Bank of England governor, and Huw Pill, the Bank’s chief economist, have both hinted in the past week that they think interest rates are restrictive enough at the current 5.25 per cent to suck demand out of the economy and help reduce prices.
The labour market is a key indicator for future inflation, as high wage growth is likely to support consumer spending and sustain inflationary pressures. However, a recent rise in unemployment suggests that wage growth will subside later this year, as workers’ bargaining power to demand inflation-busting pay is reduced.
While most economists think that wage growth has peaked, some have warned that the pace of earnings growth will only fall back gradually, dropping to around 7 per cent by the end of the year, according to Sanjay Raja at Deutsche Bank. He warned that this is nearly double the rate that the Bank needs to see in order to ensure that inflation falls back to its 2 per cent target by 2025.
Yael Selfin, chief economist at KPMG, said she expected the Bank to raise rates again by another 0.25 percentage points as the high pay growth “continues to present a conundrum for ratesetters”.
The Monetary Policy Committee meets to make its next interest rate decision on September 21.