Brits keep getting pay rises — despite the Bank of England’s warnings

LONDON — Despite pressing pleas from the government and the Bank of England for big pay rises for British workers, both countries blame high wage growth for Britain’s inflation woes.

UK wages excluding bonuses rose by 7.3% in the three months to May compared with the same period last year, the ONS revealed on Tuesday.

Bank of England Governor Andrew Bailey and U.K. Finance Minister Jeremy Hunt told an audience in the City of London on Monday that the high wages solution was hurting their efforts to curb inflation.

UK headline consumer price inflation hit an annual rate of 8.7% in May, unchanged from the previous month but well above the central bank’s 2% target. Adding to policy makers’ concerns, core inflation — which excludes volatile energy, food, alcohol and tobacco prices — rose to 7.1% from a year earlier, the highest since March 1992.

“These data suggest that workers are still managing to deliver significant wage gains despite an apparent cooling in the overall labor market, which may reflect companies’ attempts to keep skilled workers from leaving, but also suggests headline data point to market weakness,” said Stewart R. Stuart Cole said:

“The BoE has repeatedly warned that high wage growth remains a significant obstacle to its efforts to reduce inflation, and today’s data do little to convince it that the labor market is no longer hot enough to conclude that monetary policy needs to be tightened further. “

Much of the increase in wages was driven by the private sector, increasing to an annualized 7.6% in the three months to April.

Hunt and Prime Minister Sunak are due to decide this month whether to approve pay rises of around 6 per cent for public sector workers, who have been on strike across sectors for the past year.

“No one can blame cash-strapped workers for demanding a little bit more in their wages so they can try to maintain the standard of living they’ve grown accustomed to,” said Danni Hewson, director of financial analysis at AJ Bell.

“A 7.3 per cent increase may look large on paper, but in reality inflation is eating up that extra money and making households far worse off.”

It will be further tightened in the future

Britain has been hit by a cost of living crisis for the past 18 months, following the inflationary shock from the Covid-19 pandemic and Russia’s invasion of Ukraine.

However, Bank of England Governor Bailey noted in a speech at his residence on Monday that the UK economy had proved surprisingly resilient. While acknowledging that no one wants to see “job losses or weak growth”, he said price and wage increases at current levels are “not consistent with the inflation target”.

In order to curb inflation, the central bank has raised interest rates at monetary policy meetings for 13 consecutive times, the most recent one being 50 basis points last month, raising the benchmark interest rate to 5%. Given the strong wage data, the market is now pricing in about a 64% chance that the MPC will choose to raise rates by another half percentage point in August to 5.5%.

Deutsche Bank was among those to raise its August forecast to 50 basis points after Tuesday’s data, though it kept its final rate forecast at 5.75% and raised at least another 25 basis points in September.

Risks to the final rate forecast are “firmly tilted to the upside,” senior economist Sanjay Raja said in a note Tuesday, but noted that “positive signs are brewing in the labor market.” , at least as far as central banks are concerned.

The unemployment rate unexpectedly rose to 4% from 3.8% in the three months to April, while job vacancies continued to decline. The employment rate rose to 76% due to an increase in part-time employment, while the economic inactivity rate fell to 20.8% from the previous quarter, continuing a recent downward trend.

“Inactivity continues to decline. Participation rates are still rising. The unemployment rate is slightly higher than the MPC expected in May, and we are seeing more survey data pointing to a downward trend in wage growth and inflation in the coming months,” Raja said. Provides some potential comfort to the Treasury and the Bank of England.

However, Equiti’s Cole warns that the boost from rising unemployment could see the central bank “much less meaningful if hours and wages rise together, putting more income into workers’ wage packets” in the central bank’s battle to rein in CPI.

Not a Wage Spiral

The government and the central bank have repeatedly called on workers not to demand inflation-based pay rises, a move that has drawn the ire of unions and the broader British public.

Bank of England’s own annual report last week’s accounts It was revealed that last year all senior officials, with the exception of Bailey, accepted a base salary increase.

Last summer, there were a series of strikes and protests as real wages – which reflect the power of workers’ wages after accounting for inflation – fell at a record pace.

Even the sharp year-on-year increase in the latest figures has failed to match inflation, meaning workers continue to feel poorer and demand big pay rises, although the BoE expects a sharp drop in inflation as food prices fall and energy prices fall will run through it.

However, Callum Pickering, senior economist at Berenberg, said changes in the supply-demand balance and leading wage indicators suggested that a “dreaded wage-price spiral” now looked unlikely.

“There is no doubt that current nominal wage growth remains too high relative to sustainable growth rates of around 3.5-4.0% year-on-year. However, survey-based measures of consumer inflation expectations are falling rapidly – Serious concerns about rising price pressures amid expectations of higher inflation ahead, Pickering said in a note on Wednesday.

The inflation expectations component of GfK’s consumer sentiment survey in June fell to its lowest level since the 2016 Brexit referendum, while the central bank’s own survey of inflation expectations for the second quarter showed consumers expect inflation to fall to 2.6 in 12-20 years %. The 24-month period is in line with the 10-year average and down from 3.4% in the fourth quarter of 2022.

“Despite strong growth in money wages, real wages are still falling year-on-year. Once inflation falls below nominal wage growth and real incomes start to recover, money wage growth should decelerate. This would be normal for a tight labor market shock to real incomes response,” Pickering said.

“External supply shocks, domestic political uncertainty (including Brexit), excessive fiscal and monetary policy stimulus, and labor shortages have all contributed to excessive pressure on UK prices, but three of these trends have reversed,” he added.

Pickering said he expected producer prices to lead inflation for about three months and normalize as energy and commodity supply shocks dissipated, while less political uncertainty would support higher “boosting productivity” invest.

“Tightening monetary and fiscal policies are currently constraining broad money growth – a proxy for demand that typically brings inflation forward by about nine to 12 months,” he said.

“Improving supply coupled with slower demand will weaken firms’ pricing power and reduce their willingness to raise wages to attract new workers.”