UK wages grew at a record 7.8% between April and June, the highest rate of increase since the Office for National Statistics (ONS) began monitoring the data in 2001, raising expectations of further interest rate rises.
Meanwhile, the unemployment rate ticked up 0.3 percentage points in the quarter to 4.2%, despite the economic inactivity rate falling 0.1 percentage points to 20.9%.
Reacting to the latest UK labour market data, Quilter Cheviot’s head of fixed interest research Richard Carter said: “While it is premature to call the beginning of the end of the UK’s cost-of-living crisis, the pressures are showing signs of easing.
“On the eve of an inflation print that is expected to reveal a marked fall, this morning’s labour market statistics show wages might be growing faster than prices for the first time in almost two years.”
Industry reaction
While the data may show signs of the cost-of-living crisis beginning to ease, the record rise in average pay has prompted concerns among industry commentators that it could fuel inflation fears and further interest rate rises.
Inflation currently stands at 7.9%, with commentators anticipating an easing in tomorrow’s (16 August) Consumer Price Index print for July.
Carter added: “The BoE will be studying this week’s data carefully, but even if inflation falls as expected in tomorrow’s CPI print following a drop in energy prices, the inflationary pressure of still rising wage growth means the Bank is unlikely to put a halt on further rate rises just yet.
“What’s more, even if inflation does come in lower than wage growth tomorrow, very few people will feel any real benefit. Rising mortgage rates and high everyday costs continue to put a strain on personal finances, particularly as lower inflation will take some time to feed through to the prices people are paying.”
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On the consequences the labour market data may have for the BoE, Axa IM G7 economist Modupe Adegbembo commented: “On the one hand, the labour market is seeing slack emerge much faster than the BoE anticipated. Unemployment now stands close to the Bank’s most recent estimate of the non-accelerating inflation rate of unemployment of 4.25%. Furthermore, the BoE’s August projections expected unemployment to rise to 4.2% in Q2 2024.
“At the same time, wages which are key for medium term inflation remain elevated and not all of the upside surprise can be explained by data revisions. We continue to expect the BoE to hike Bank Rate by 25bps at its next meeting in September, bringing Bank Rate to 5.5%.
“Following this we expect the BoE to remain on hold, but signs of continued strength in wages could see the BoE continue to hike. Tomorrow’s CPI data remains important and we will see another month’s labour market and inflation releases before the September meeting, which will be key.”
Markets anticipating September rate rise
Sterling edged upwards in the wake of the data release in anticipation of further interest rates, according to Hargreaves Lansdown’s head of money and markets Susannah Streeter (pictured).
She said: ”The blast of cold air from higher interest rates is being felt in the labour market, with unemployment ticking up but the risk is that the growth in wages will continue to fan the fires of inflation.
“With the highest annual wage growth recorded in June since records began in 2001, another rate hike from the BoE looks bolted on in September. The pound has crept upwards on expectation that rates will rise again but significant gains are set to be limited given the challenges ahead of the UK economy. Sterling rose by 0.28% immediately after the jobs data was released, rising to $1.272 and also strengthening against the euro, before losing some ground.
“The picture painted by these jobs numbers is adding up to be a stagflation scenario, with prospects of growth slim while inflation risks staying stubborn. Industrial disputes between NHS workers and the government are not helping the inflation battle,” Streeter added.
“The number of people inactive because of long-term sickness has increased to a record high, and with painful waits for treatment not set to be cured any time soon, the fight for labour is set to continue.
“With real wages moving back into positive territory for the first time and surpassing the headline inflation rate, consumer spending is expected to stay more upbeat, which bodes better for companies selling discretionary goods – items we might want but we don’t necessarily need.”
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