Pay in the UK grew faster than expected and hit a record high in the three months to May, adding to pressure on the Bank of England as it tries to tame inflation.
Employees’ regular average pay, which excludes bonuses, grew at an annual rate of 7.3 per cent in the three months to May, the highest growth on record.
This was higher than the 7.1 per cent forecast by analysts polled by Reuters and matched the reading during the coronavirus pandemic and in the three months to April, which was revised up from an initial estimate of 7.2 per cent.
Sterling briefly rose to a 15-month high against the dollar of more than $1.29 on Tuesday before falling back to trade at $1.2873, up 0.1 per cent on the day. Two-year gilt yields, which move in line with interest rate expectations, dropped 0.1 percentage points to 5.26 per cent, as traders slightly reduced the level at which they expect BoE interest rates to peak early next year.
Growth in total pay, which includes bonuses, accelerated more than expected to 6.9 per cent in the three months to May, up from a revised 6.7 per cent in the three months to April.
In March to May 2023, average regular pay growth for the private sector was 7.7 per cent, the fastest increase outside the pandemic period. For the public sector it was 5.8 per cent.
Yael Selfin, chief economist at KPMG UK, said: “Today’s data confirm that the labour market is still too hot, as pay growth remains uncomfortably high.”
She added that the tightness of the UK labour market had “created unique circumstances when compared to the US or Europe, and will probably require higher UK interest rates to bring pay growth to levels where the Bank of England is comfortable”.
Markets are pricing in that the BoE will raise its bank rate by another half a percentage point at the next meeting on August 3.
BoE governor Andrew Bailey and UK chancellor Jeremy Hunt on Monday joined forces to call for wage restraint, as they told a City of London audience that high pay settlements were hampering the fight against inflation.
There are some signs of weakening in the labour market, however.
The unemployment rate for March to May 2023 increased by 0.2 percentage points to 4 per cent. This was higher than analysts’ expectations of 3.8 per cent.
The rise in unemployment was partially caused by more people coming back to the labour market, with the economic inactivity rate decreasing by 0.4 percentage points to 20.8 per cent in March to May 2023.
“While the labour market is now easing, it’s not loosening quickly enough for the Monetary Policy Committee to be comfortable,” said Thomas Pugh, economist at the consulting firm RSM UK.
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Job vacancies also continued to fall. In April to June 2023, the estimated number of vacancies fell by 85,000 on the quarter to 1,034,000.
Hunt said: “We still have around 1mn job vacancies, pushing up inflation even further. Our labour market reforms — including expanding free childcare next year — will help to build the high wage, high growth, low inflation economy we all want to see.”
The annual growth in pay was strong across many sectors. The finance and business services sector recorded the largest regular growth rate at 9 per cent, followed by the manufacturing sector at 7.8 per cent — the highest in manufacturing since comparable records began in 2001.
Despite strong nominal wage growth, earnings did not keep pace with inflation, at present running at an annual rate of 8.7 per cent. When adjusted for inflation, growth in total and regular pay fell by 1.2 per cent and 0.8 per cent respectively.
Paul Nowak, TUC general secretary, said: “Working families have suffered 15 years of falling living standards. Ministers shouldn’t be forcing households to become even poorer.”
Additional reporting by Mary McDougall
Source: Economy - ft.com
