Jump in UK minimum wage keeps Bank of England on alert

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A second successive jump in the UK minimum wage will keep the Bank of England on high alert for signs of pay growth feeding inflation, even as broader price pressures in the economy start to ebb.

Official figures last week showed UK wage growth finally slowing from record highs, with average earnings, excluding bonuses, rising at an annualised rate of just 3.5 per cent in the three months to January from the previous quarter.

The BoE is expected on Thursday to hold interest rates at 5.25 per cent, as it waits for more evidence of cooling pay growth and inflation. New data on consumer prices will be published on Wednesday.

In April, the main hourly rate of the statutory national living wage will rise 9.8 per cent to £11.44 — the sharpest increase since 2001, following a similar upwards move last year. Younger workers and apprentices will get an even bigger increase of up to 21 per cent in their hourly pay.

The UK’s statutory wage floor is already one of the highest in the rich world. But economists said the effects of further increases on falling price growth were increasingly unpredictable, and could be one reason the BoE may wait longer than other central banks before cutting rates.

“The fear is that the rise this year will contribute to stickier wage growth and inflation,” said Ashley Webb, UK economist at consultancy Capital Economics, noting that last year’s pay boost had coincided with the biggest monthly jump in consumer prices since 1991.

In the past, changes in the wage floor have had a relatively limited impact on pay growth across the economy, with just one in 20 workers paid at the legal minimum, and about one in six receiving an hourly rate within £1 of the minimum.

The BoE said last month that this year’s increase could push up aggregate wage growth by a manageable 0.3 percentage points, even after accounting for knock-on effects as employers also sought to compensate staff higher up their pay scales.

But analysts warned that the NLW increase could have a bigger impact than usual on consumer prices — which rose at an annual rate of 4 per cent in January — because its effects will be concentrated in sectors where employers are competing fiercely for staff and many want to stay ahead of the statutory minimum. 

Since January, all the main food retailers — including Tesco, J Sainsbury and Asda — have said that store staff will receive at least £12 an hour from April, matching the higher voluntary rate set as a benchmark for good practice by the Living Wage Foundation charity.

Discount supermarket Aldi, which claims it will “never be beaten on pay” by rivals, will set its starting rate at £12.40.

But some businesses say they are running out of ways to absorb higher wages in their margins, following a long period of intense cost pressures.

Tesco’s chief executive Ken Murphy told analysts in January that “in terms of profitability . . . clearly we’re expecting some headwinds from wages” in the year ahead.

“Businesses want to pay their staff a good wage . . . but there is a limit to how much new cost firms can absorb, before they have to start passing it on,” said Jane Gratton, deputy director of public policy at the British Chambers of Commerce, a business lobby group.

Clive Black, head of research at investment group Shore Capital, said wage pressures affecting food manufacturers and logistics providers, as well as supermarkets, would keep food inflation in the “mid-single digits” over the next year, although headline inflation was falling.

Hospitality employers, facing higher business rates as well as wages, could also seek to recoup the increase from customers. Catherine Mann, a BoE rate-setter, warned last month that services inflation, a key concern for the central bank, could remain high because of a “lack of consumer discipline” among richer people spending freely on restaurants and travel.

Research by the Low Pay Commission, which advises the government on how fast the minimum wage can rise without adverse effects, showed a higher share of businesses than usual expected to pass higher wage costs on to consumers in 2023, while worrying that they were “reaching a limit in what they could pass through without undermining demand”.

Neil Carberry, chief executive of the Recruitment & Employment Confederation and a former LPC commissioner, said employers were increasingly worried about how to treat staff at all levels fairly, with a sense that a 10 per cent rise in the wage floor would “have a big effect on average wages as well”.

This article has been amended to clarify that average earnings have grown at an annualised rate of 3.5 per cent in the latest three month period compared with the previous three months