In a development that is sure to raise eyebrows at the Bank of England, the latest labour market figures from the Office for National Statistics (ONS) show that average regular pay in the UK surged by a robust 5.2% in the three months to October. This marks a notable acceleration from the 4.4% wage growth recorded in the previous three-month period, and is likely to fuel concerns that inflationary pressures in the economy are proving trickier to subdue than policymakers had hoped.
The strong pay gains were broad-based, with the manufacturing sector leading the charge at 6% annual growth – a testament to the high demand for skilled workers in this crucial part of the economy. When bonuses are factored in, overall pay growth also clocked in at a healthy 5.2%. Crucially, this means that real wages – pay adjusted for inflation – rose by 3%, putting more cash in consumers’ pockets just in time for the holiday shopping season.
Interest rate cut hopes dashed
The buoyant wage data all but extinguishes any lingering hopes that the Bank of England’s Monetary Policy Committee might deliver an early Christmas present in the form of lower borrowing costs when it meets later this week. Policymakers are sure to fret that such strong pay increases will put a floor under prices, making it harder to rein in inflation that is already expected to remain elevated in the coming months.
Still, the employment report did offer some crumbs of comfort for those worried that the jobs market is overheating. Job vacancies, which can provide a useful leading indicator of future hiring intentions, continued to trend lower – dropping by another 3.7% to 818,000 in the latest three-month period. Vacancies have now fallen by a cumulative 486,000 since hitting a peak in the spring of 2022, as the post-pandemic economic boom began to fade.
Mixed signals on jobs
Elsewhere, the data presented a more mixed picture. The unemployment rate ticked up slightly, with the number of people out of work and seeking a job rising by 31,000. However, this was offset by an even larger increase in employment, with the ONS reporting 173,000 more people in work in the three months to October. A caveat here is that much of those job gains were concentrated in the health and social care sector.
Despite the news that UK GDP dipped by 0.1% in October, there is little sign in the latest figures of the kind of widespread labor market weaknening that would point to a looming recession. With real wages climbing at the quickest pace in over a year, households should see some relief from the relentless pressure on finances – which bodes well for consumer morale heading into 2024.
The strong wage growth we’re seeing will make the Bank of England’s job of tackling inflation that much harder. Policymakers will be concerned that rising pay will keep prices elevated even as the economy cools.
– Official statement sources
Budget measures yet to feed through
Economic observers were quick to point out that these latest jobs figures pre-date November’s Autumn budget, in which Finance Minister Rachel Reeves unveiled a £25bn tax hike on employers in the form of higher National Insurance Contributions. That move has angered business lobby groups, who warn that it will lead to job losses as companies look to offset the increased costs. The true impact won’t be known for some months, however, as the measures only take effect from April 2024.
Conversely, Reeves’ decision to sharply lift the statutory minimum wage is likely to act as a tailwind for pay – further complicating the inflation picture. With so many competing cross-currents, it will fall to the Office for National Statistics to decipher the state of the jobs market in the months ahead. But for now, the key takeaway for the Bank of England is that bumper wage gains risk making their inflation battle a whole lot trickier.
