UK Wages Rise More Than Expected in Added Sign of Inflation
(Bloomberg) — UK wages rose quicker than expected at the end of 2022, heaping pressure on the Bank of England to deliver another interest-rate increase next month.
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Average earnings excluding bonuses were 6.7% higher in the three months through December from the previous year, the Office for National Statistics said Tuesday. That’s the fastest pace since records began in 2001, excluding the pandemic period.
The figures provide ammunition to BOE policymakers who say that more needs to be done to bring double-digit inflation back to the 2% target, with the tightness of the labor market a key warning sign.
They argue that elevated inflation risks becoming entrenched if workers continue to bid up wages, as companies will keep raising prices to cover their salary costs.
“The tight labor market will remain a stubborn source of domestic inflationary pressure for some months yet,” said Ashley Webb, UK economist at Capital Economics. “We think the Bank of England may have one or two more rate hikes in the pipeline.”
The pound advanced as much as 0.3% to $1.2171, the day’s high, after the jobs data.
What Bloomberg Economics Says …
“The labor market isn’t cooling fast enough for the Bank of England to pause its hiking cycle — just yet. Private sector pay growth surprised again to the upside and the economic slowdown has yet to have an impact on unemployment.”
—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.
The figures also showed the economy kept adding jobs at a healthy pace. Employment in the final quarter of the year rose 74,000, almost triple the rate of the previous three-month period.
“Businesses are crying out for people to fill job vacancies,” said Jane Gratton, head of people policy at the British Chambers of Commerce. “It is also ramping up pressure on wages.”
Chancellor of the Exchequer Jeremy Hunt hailed the figures as a sign of strength in the economy but said officials need to bear down on inflation.
“In tough times unemployment remaining close to record lows is an encouraging sign of resilience in our labor market,” Hunt said. “The best thing we can do to make people’s wages go further is stick to our plan to halve inflation this year.”
Wage growth was even faster than the 6.5% pace expected by economists, and the previous three-month period’s increase was revised up by 0.1% to 6.5%.
A surge in inflation has triggered a wave of industrial action as workers from train drivers and civil servants to nurses and paramedics seek to protect their living standards.
In December, 843,000 working days were lost to strikes, the most since 2011. Adjusting for inflation, pay fell 2.5% last year, one of the biggest declines since 2001.
“Family budgets have been decimated by more than a decade of pay stagnation,” Trades Union Congress General Secretary Paul Nowak said. “It is little surprise that workers are having to take strike action to defend their living standards. They have been pushed to breaking point.”
Private-sector wages rose 7.3%, a record rate and faster than the 4.2% raises awarded on average across the public sector. Even so, public-sector wages are now rising at the fastest pace since 2006, with a further acceleration likely as pay deals this year come through.
The BOE has raised rates from 0.1% to 4% in the fastest policy-tightening cycle since the late 1980s. Markets are expecting rates to peak at 4.5% by mid-year.
Surveys are showing labor-market pressures are easing along with a growing risk of recession, but most officials have signaled they want to see more evidence in the official data.
An acute shortage of workers is underpinning pay demands in many sectors. Hundreds of thousands of people have left the labor force since the pandemic, leaving unemployment at 3.7%, near the lowest rate since the 1970s.
Yael Selfin, chief economist at KPMG UK, said there were signs that the labor market may be cooling despite the increase in wages.
“Vacancies are now 166,000 below their peak in May 2022 – a drop of 13%, while the redundancy rate is back to pre-pandemic levels,” she said.
The report also showed:
Inactivity dropped 0.3 percentage points to 21.4% as students returned to the workforce. There was a record flow of people out of inactivity and back into the jobs market, but the level remains 516,000 higher than it was before the pandemic.
Vacancies fell 76,000 for a seventh quarter running to 1.134 million.
Redundancies rose by 24,000 in the fourth quarter to 99,000. That was the highest rate since 2021 but still below pre-pandemic averages.
Employment rose by 74,000 but remains 260,000 fewer than before the pandemic. The UK is the only major industrialized economy where employment has yet to recover since Covid hit.
“While there are tentative signs that more people are looking to get back into work, there are still very high vacancies and businesses are having difficulty filling them,” said Matthew Percival, director for people and skills at the Confederation of British Industry.
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–With assistance from Tom Rees, Joel Rinneby, Libby Cherry, Lucy White and Eamon Akil Farhat.
(Updates with TUC and BI comment from seventh paragraph.)
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