UK wages grow 7.8% even with the job market slowing down

The UK experienced record-breaking wage growth in the three months leading up to July. Based on official data released by the Office for National Statistics, the annual growth in average pay, excluding bonuses, remained at an impressive 7.8%, the highest rate since comparable records began in 2001. The growth was even more substantial at 8.5% when considering total pay, including bonuses.

The increase was partly due to one-off payments made to NHS workers and civil servants following pay agreements that aimed to resolve strike action. This development means that average wages are growing faster than inflation, providing some relief for households. However, it will likely intensify the Bank of England’s concerns over inflation.

UK’s job market shows mixed signals

The latest data shows a mixed picture of the UK labor market. While wage growth surges at record levels, other indicators like unemployment and job vacancies paint a less optimistic picture. Over the three months leading up to July, unemployment rose by 159,000, pushing the unemployment rate up by 0.5 percentage points to 4.3%. Employment also dropped by 207,000 during this period, and job vacancies fell below 1 million for the first time in two years.

This divergence between strong wage growth and other labor market indicators will likely challenge the Bank of England as it considers whether to continue raising interest rates. The central bank has been seeking signs that the pace of pay settlements is slowing, but it is also aware that previous rate hikes are impacting growth and employment.

The breakdown of the pay data reveals that annual earnings in the private sector grew by 7.6%, while earnings in the public sector rose by a more substantial 12.2%. Regular pay, which excludes bonuses, maintained its growth rate at 7.8%.

Chancellor Jeremy Hunt commented on the data, noting the high number of employees on payroll and the relatively low unemployment rate compared to international peers. He also highlighted the importance of sticking to the plan to combat inflation for sustainable real wage growth. The markets are pricing in a significant probability of a 0.25 percentage point rate hike by the Bank of England on September 21.

UK central bank remains divided while the Pound surges

The Bank of England is currently grappling with internal divisions regarding how to respond to inflation. While Governor Andrew Bailey has hinted at a potential slowdown in rate hikes, fellow policy member Catherine Mann has advocated for a more aggressive tightening stance to prevent persistent inflation.

Attention is now shifting to upcoming inflation data. The BOE anticipates a temporary surge to 7.1% in August before gradually declining towards the 2% target. The high wage growth also challenges Hunt as he aims to create fiscal room for potential tax cuts ahead of an expected general election next year.

A commitment to the “triple-lock” formula, which determines state pension increases based on higher wage growth, inflation, or 2.5%, could lead to a substantial boost for retirees next year. That is contingent on the earnings figures for May to July, which are expected to be released soon.

The BOE foresees a steady rise in unemployment to 5% by 2026. A critical question is how far unemployment must increase before the labor market cools down enough to temper wage growth, driven by workers trying to keep pace with the rising cost of living.

Meanwhile, the British Pound experienced a surge against the Euro and the Dollar following stronger-than-expected UK wage data. The initial market reaction led to higher Pound Sterling and UK bond yields, indicating that the market has heightened expectations for the magnitude of further interest rate hikes needed to combat inflation in the UK.

The pound-to-euro exchange rate briefly climbed to 1.1668 before moderating to 1.1642. Similarly, the Pound Dollar exchange rate rose to 1.2529 before settling at 1.25.

However, the Pound’s inability to sustain these gains may be attributed to the nature of the pay data, which is backwards-looking and includes a significant one-time increase in pay for public sector workers, particularly in the NHS, whereby this one-off bump could limit the overall market reaction to the data.