The dilemma facing Bank of England rate setters deepened today as official data revealed wages rose father than expected at the end of last year.
Two days ahead of a likely confirmation that the UK economy slipped into recession in the second half of 2023, latest figures from the Office for National Statistics (ONS) showed regular pay went up by an average of 6.2% in the three months to December.
That was faster than the 6% expected by City economists and represents an uncomfortably high number for the Bank’s Monetary Policy Committee (MPC) as it contemplates the timing for a first cut in interest rates, expected in May or June.
The MPC is though unlikely to want to sanction a reduction in the cost of money while wages are rising so much faster than inflation, stoking up demand in the economy.
Real regular wages rose by 1.9% — the highest since summer 2019, excluding the pandemic years.
Danni Hewson, head of financial analysis at brokers AJ Bell, said pay growth was still “uncomfortably high”.
She said: “We are still in the peculiar position where some good news is still taken as bad news by markets. The fact that the UK labour market is proving a whole lot more resilient than had been expected does seem to tie the hand of UK rate setters trying to keep a tight grip on inflation. During ‘normal’ times falling unemployment is a positive thing but a tight labour market means greater competition for workers, something which forces employers to up the ante when it comes to wages.”
Victoria Clarke, UK chief economist at Santander CIB, said: “There remains much uncertainty about whether pay will fall far enough and fast enough to give the BoE the confidence to cut rates before summer. A key focus is the impact that the (9.8%) April rise in the National Living Wage will have on pay momentum this spring, and whether it will drive broader pay uplifts.”
However, the wage growth figure was down from 6.7% in the previous quarter and was the slowest rate for more than a year.
Total pay, including bonuses, only rose by 5.8%. Vacancies also dropped for the 19th consecutive month, down 26,000 to 932,000 in the three months to January, although the decline was the smallest for a year-and-a-half. The unemployment rate fell to 3.8% in the final three months of 2023, down from 3.9% in the three months to November and the lowest level since the November 2022 to January 2023 quarter.
The data also showed inactivity remaining at 21.9% in the three months to December, having last month seen big upward revisions as the UK struggles with high levels of long-term sickness.
Chancellor Jeremy Hunt said: “It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done.
“Our tax cuts are part of a plan to get people back to work so we can grow the economy — but we must stick with it.”
Jack Kennedy, senior economist at the global hiring and matching platform, Indeed, said wage growth remains particularly strong in lower-paid sectors such as childcare (9.9%), cleaning (8.4%) and retail (8.1%).
Figures out tomorrow on inflation are likely to show a small uptick in the rate of price rises in January, further adding to the Bank’s headaches.