Kate Andrews Kate Andrews

Will higher wages lead to more inflation?

Credit: Getty images

Good news for workers: wages are up. According to the latest data, released by the Office for National Statistics this morning, annual pay increased by 5.2 per cent in the three months leading up to October. 

Despite inflation returning broadly to the Bank of England’s 2 per cent target, these above-inflation wage increases will be providing relief, still, for workers who are still coping with significantly higher prices as a hangover from the inflation crisis. But a positive story for employees is often more worrying news for Threadneedle Street, which insists that wage increases risk second-round inflationary effects. Today’s news has markets speculating that the Bank may slow its rate-cutting process further: between the public sector wage hikes over the summer, rising private sector wages, and the Budget’s borrow-to-spend plans, an already hawkish Bank may well go slower in its bid to reduce the base rate.

This is unlikely to have an immediate impact. The BoE was already expected to hold rates at their meeting this week, after the Monetary Policy Committee voted to cut rates by 0.25 percentage points last month. The bigger question looms over how fast rates are reduced next year. Capital Economics notes that pay raises have outpaced the Bank’s November forecasts, and its inclination to keep rates at 4.75 per cent will ‘especially be the case’ that ‘if tomorrow’s data release shows that CPI inflation rose further than the Bank expected in November as we anticipate'.

Meanwhile, the unemployment rate remained unchanged at 4.3 per cent between August and October, while job vacancies fell again – to 818,000 – taking the total close to pre-pandemic levels. But the headline figures don’t come close to telling the full story in the UK labour market, where a near-record 2.8 million working-age people remain inactive due to long-term sickness.

It’s the first set of figures released since the Prime Minister’s November push to get two million people back to work. Yet the real impact on jobs and employment is yet to show up in the figures: the government’s decision to increase employer National Insurance from next April. These most recent figures, up until October, still reflect pre-Budget announcements, when businesses were speculating but unaware of the tax change, which had seemingly been ruled out in Labour’s election manifesto. 

In the Office for Budget Responsibility’s assessment of the Budget, the watchdog noted that workforce participation is expected to fall due to the measures. It also noted that the bulk of the NI tax hike is expected to be passed on as smaller wage increases for workers and higher prices for consumers. These forecasts will be validated or debunked in future releases – but with the underlying figures far more worrying than the headline unemployment rate reflects, it’s a dicey position for the government to be starting from.

Comments