The UK is experiencing a surge in wages, marking the fastest growth in over three years. According to the Office for National Statistics (ONS),pay packets increased by an average of 3.4% between September and November 2024, compared to the same period in the previous year, when factoring in inflation. This growth was especially pronounced in the private sector, exceeding gains observed in the public sector.
Despite this robust wage growth, experts anticipate the Bank of England will still proceed with a reduction in interest rates next month. Currently at 4.75%, rates are projected to drop to 4.5% in Febuary. This prediction stems from an unexpected decline in inflation last month, coupled with the Bank’s ongoing monitoring of both pay and employment data when making decisions regarding interest rates.
The ONS reported that average weekly earnings in the UK reached £660 in November, when inflation stood at 2.6%. While the latest inflation figure is 2.5%, the gap between wages and inflation is the widest it’s been in over three and a half years. Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, commented, “Pay hasn’t put this much clear blue water between itself and inflation for around three and a half years, so the difference is palpable. It’s leaving us with more money at the end of the month.”
However, Coles cautioned that rising wages could potentially fuel inflation, potentially delaying interest rate cuts. Nevertheless, she believes that “on balance, the lack of growth in the economy, and a month of falling inflation, are likely to mean a rate cut in February is still on the cards.”
Ashley Webb,UK economist at Capital Economics,shared a similar sentiment,stating that while some policymakers might be concerned about the resurgence in private sector wage growth,most likely anticipate signs of a loosening labor market,leading to a rate cut.
Adding further context, the UK’s unemployment rate is estimated to have risen slightly to 4.4%, while the number of vacancies dropped by 2.9% to 812,000 between October and December. While this decline continues, the vacancy rate remains above pre-pandemic levels. It’s crucial to note that the ONS advises treating these figures with caution due to potential limitations in the data caused by lower-than-usual response rates to their survey.
UK Sees Wage Growth Despite Economic Uncertainty
the UK labor market is showing mixed signals, with robust wage growth juxtaposed against rising economic anxieties. Recent figures reveal regular pay increased by 5.6% between September and November compared to the previous year, marking the highest growth in over three years. though, factoring in inflation, the real wage increase stands at a more modest 3.4%.
This positive news on wages could be short-lived, warns Yasmine Coles, an economist. “There is a risk that businesses facing higher costs will cut back on both staff and wage rises going further into the year,” she says.
Contributing to this uncertainty is a recent wave of tax rises aimed at businesses.Chancellor Rachel Reeves implemented a £40bn package, including hikes in National Insurance rates and reductions to employer thresholds.
Businesses have repeatedly voiced concerns that these extra costs, coupled with rising minimum wages and reduced business rates relief, could stifle economic growth. They fear a potential squeeze on resources, limiting their ability to offer competitive pay rises and create new jobs.
Despite these anxieties, Rob Wood, chief UK economist at Pantheon Macroeconomics, offers a more measured outlook. “There is little sign from jobless claims and redundancies of a sharp labour market downturn.The labour market is loosening, but only gradually,” he notes.
The current labor market dynamism is certainly intriguing. While tech-driven sectors like engineering,IT,and AI continue to experience high demand for skilled workers,leading to attractive salary packages,a sense of caution is settling amongst job seekers. As Petra Tagg, director at recruitment firm Manpower UK, observes, “Workers are less likely to be moving [companies] as people are more nervous to look for employment in these… quite concerning times.”
The UK’s longstanding struggle with worker shortages in various sectors adds another layer to this complex picture. While these shortages can hinder economic growth, they also empower workers in those industries to negotiate higher pay deals.
The interplay between wage growth, inflation, and potential economic slowdown adds further complexity. While increased consumer spending driven by higher disposable income can fuel economic activity, it can also lead to inflationary pressures, pushing up prices and eroding the real value of wages.
Work and Pensions Secretary Liz Kendall sees the current labor market dynamics as a call to action. She advocates for boosting employment and working towards a stronger, more resilient economy, emphasizing the government’s commitment to reforming Jobcentres and providing young people with opportunities to learn and earn.
PAA: According to Dr. Hartley, what are the potential implications of rising wages for both households and the Bank of England’s interest rate decisions?
Archyde News Interview
Title: navigating the UK Economy: Wage Growth, Interest Rates, and Inflation
archyde: Today, we’re joined by Dr.Amelie Hartley,a renowned economist and researcher at the University of Cambridge. Dr. Hartley, thank you for joining us today.
Dr. Amelie Hartley (AH): thank you for having me.
Archyde: Let’s dive right in. The Office for National Statistics recently reported a surge in UK wages, marking the fastest growth in over three years.What’s your take on this progress?
AH: It’s indeed a significant development. The 3.4% increase in wages,when adjusted for inflation,is quite robust and especially pronounced in the private sector. This could be a sign of a tightening labor market, with employers competing for workers by offering higher wages.
Archyde: Despite this, experts anticipate a reduction in interest rates next month. Why might that be,given the wage growth?
AH: That’s an interesting question.While wage growth is positive for households, it’s not necessarily great news for the Bank of England when it comes to interest rates. You see, a resurgence in wages could fuel inflation, which is the opposite of what the Bank wants when it’s considering a rate cut.however, there are other factors at play here. Inflation has unexpectedly declined,and the economy’s growth seems to be sluggish. These factors,coupled with the wage growth,might not be enough to deter the Bank from its projected rate cut.
Archyde: Speaking of inflation, the gap between wages and inflation is currently at its widest in over three and a half years. How should working Britons interpret this?
AH: It’s great news for workers. It means their pay is outpacing the rise in prices, leaving them with more disposable income. However, as we’ve discussed, it’s also a complexity for the Bank of England, as rising wages can put upward pressure on prices.
Archyde: The unemployment rate has risen slightly, and there’s been a drop in vacancies. Doesn’t this contradict the narrative of a tight labor market?
AH: Not necessarily. The labor market is complex and doesn’t always move in straightforward ways. While the unemployment rate has risen, it’s still relatively low at 4.4%. The number of vacancies remains above pre-pandemic levels, indicating that there’s still demand for labor. The recent decline could be due to various factors, such as Brexit uncertainty or economic slowdown.
Archyde: Dr. Hartley, thank you for sharing your valuable insights. That’s all we have for today. Is there anything you’d like to add before we wrap up?
AH: Just that it’s crucial to keep things in perspective. wage growth is positive, but it’s vital to consider the wider economic context. We should be mindful of how it might affect inflation and the Bank’s interest rate decisions.
Archyde: wise words indeed. Thank you, Dr. Hartley, for your time and expertise.
AH: My pleasure.
