Bumper UK pay rises could be a thing of the past as inflation eases | Economics #Bumper #pay #rises #inflation #eases #Economics

Workers in the UK achieved a fifth month of inflation-busting wage rises in October, but bumper pay rises could be a thing of the past, according to the Office for National Statistics.

The average wage increase without bonuses was 7.3% in October, down from 7.8% in the latest ONS data.

Wage growth including bonuses fell to 7.2% from 8% – a bigger drop than the fall to 7.7% forecast by economists – indicating that a run of one-off payments in the public and private sectors that helped ease the pain of high energy bills have passed into history.

These increases still meant earnings outpaced inflation, which stood at 4.6% in October. We need to go back to June to find a month when headline consumer inflation outpace wage growth.

It could be argued that if the trend continues, shop prices could also continue to rise at a rate above the central bank’s 2% inflation target throughout 2024 and 2025 as firms look to pass on higher wage costs and also maintain their profit margins.

Uk pay growth chart

There is a concern among many Bank of England officials that without stronger signals from employers that the high cost of borrowing is causing them problems and making them think twice about offering historically high pay rises, the central bank should maintain interest rates at 5.25% through at least next year and possibly the next.

The financial markets don’t see it that way. Investors are more focused on how average wages grew at a slower rate in the year to October than expected by a poll of City economists.

Investors are betting that the drop in average wages towards the Bank of England’s forecast of 7.2% by the end of the year will hasten a first rate cut, possibly bringing it forward to some time in the second quarter of next year.

Strikingly, average weekly earnings excluding bonuses fell by 0.3% month onmonth in October, well below the 0.6% average increase in the first nine months of 2023.

A drop in the vacancy rate in October also fuelled speculation of a rate cut. The Bank has cited figures showing the high number of vacancies over the past two years as a strong indication of a tight labour market and a reason for keeping interest rates high.

Martin Beck, the chief economic adviser to the EY Item Club, said he expected “attention to increasingly turn to rate cuts in the new year”.

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The rhetoric of “higher for longer”, which has almost become a mantra inside Threadneedle Street, will be jettisoned in favour of speculation about the timing of a first rate cut, especially if wages fall and unemployment rises in the new year, Beck said.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said the Bank’s monetary policy committee could begin to bring down rates as early as May next year.

However, Jack Kennedy, the senior economist at the jobs site Indeed, said regular pay growth remained “very high” and “wage growth remains one of the key metrics for Bank of England rate setters”.

Until recently, the highest average pay rises could be found in the City and the business services sector, covering areas such as accountancy and the legal profession.

A drop in the average pay increase from 9.8% in the summer to 8.3% in October, may seem modest, but it could indicate that a boom in the financial services sector over the past two years is coming to an end, and with it the high cost of borrowing.

#Bumper #pay #rises #inflation #eases #Economics

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