UK Pay Rises Exceed Expectations, Adding to BoE's Inflation Concerns

The Bank of England's path to cutting interest rates may be complicated by unexpectedly strong wage growth, reported Reuters. Official data released Tuesday showed that average weekly earnings in the UK, excluding bonuses, rose by 5.2% in the three months to October compared to the same period last year. This exceeds economists' forecasts and reverses a trend of steady deceleration in wage growth seen earlier in 2023.

The Office for National Statistics (ONS) figures highlight the continued pressure on businesses to offer competitive compensation in a tight labor market. The private sector, closely watched by the BoE, saw earnings excluding bonuses rise by 5.4% in the August-to-October period, marking the fastest growth since May 2023.

This unexpected surge in wage growth could further complicate the BoE's efforts to control inflation. The central bank is tasked with bringing inflation down to its 2% target, and persistent wage pressures could necessitate a more cautious approach to interest rate cuts.

The ONS data also revealed a potential shift in the labor market. Recent business surveys indicated a decline in demand for staff following Chancellor Rachel Reeves' announcement of increased employer social security contributions in her October 30 budget. Preliminary data from the UK tax office shows employers shedding 35,000 jobs in November.

Despite this, job vacancies remained elevated in the three months to November, standing at 818,000, although this represents a 31,000 decrease from the previous quarter. Importantly, vacancies remain 22,000 higher than pre-pandemic levels. This suggests that while some employers may be adjusting to higher labor costs, the overall labor market remains tight.

The unexpected wage growth, coupled with persistent labor market tightness, could necessitate a more measured approach from the BoE in cutting interest rates. The central bank will be closely monitoring these developments as it seeks to balance the need to stimulate the economy with the goal of bringing inflation back down to its target.