- Markets anticipate further interest rate hike to combat wage growth
- Wage growth reaches highest intensity ever recorded
- Bank of England seeks evidence of decline in economic demand before suspending rate increases
The financial markets are largely anticipating that the Federal Reserve will increase interest rates by a further 0.5 percentage point next month to combat inflationary pressures, including wage growth.
The rate of wage growth, already deemed “unsustainable” by the governor of the Bank of England, has accelerated further, official figures reveal.
In the three months before May, the Office for National Statistics (ONS) reported that average weekly earnings, excluding bonuses, increased by 7.3% annually.
This is equal to the highest intensity ever recorded.
Economists anticipated a decline from the 7.2% figure initially recorded last month.
On Tuesday, however, the ONS revised this rate up to 7.3%.
The wage figure was the most anticipated item of data in the ONS report, which also revealed a decline in vacancies to 2021 low and an increase in the unemployment rate from 3.9% to 4% – factors that the bank would perversely welcome.
As part of its efforts to reduce inflation, the bank desires evidence of a decline in economic demand before suspending its cycle of interest rate increases.
Governor Andrew Bailey indicated last night that additional rate pain lay ahead, despite his prediction that energy-driven inflation would “significantly” decline in the coming months.
He contends that high pay awards, despite easing the burden on households during the cost-of-living crisis, contribute to future price inflation.
April wage growth was driven by the increase in the statutory minimum wage and the start of the new fiscal year when many pay reviews typically take effect.
The fact that salary increases have not decreased will cause policymakers concern.
Last month, the bank imposed a shocking rate increase of 0.5 percentage points, bringing the bank rate to 5%, in response to the wage increase and broader evidence that higher prices were becoming ingrained in the economy.
Separate data released on Tuesday by the British Retail Consortium indicating a modest acceleration in the rate of sales growth in June but a second consecutive month of food inflation deceleration will not convince the bank that it has gone too far.
It believes that by increasing the cost of borrowing, the rate of inflation will return to more normal levels.
The bank’s inflation objective is 2%. The consumer price index currently measures inflation at 8.7%.
The majority of market participants currently anticipate an additional 0.5% rate hike at the monetary policy committee’s meeting early next month.
Director of economic statistics at the ONS, Darren Morgan, commented on the organization’s findings: “Over the past three months, both total employment and the number of individuals actively seeking work increased, driven by men reentering the labor force.
“Although the total number of job openings remains high, it has been declining for the past year, and the rate of decline has accelerated in recent months.
“Pay without bonuses has again increased at record levels in terms of cash,” However, due to high inflation, the real value of weekly earnings continues to decline, albeit at the weakest rate since the end of 2021.
“The number of working days lost to strikes dropped to its lowest level in nearly a year, accompanied by a significant decline in public sector disruption.”
According to Samuel Tombs, chief UK economist at Pantheon Macroeconomics, there is ample evidence that companies are finding recruitment simpler, which should contribute to a sharp slowdown in wage growth next year.
“Currently, wage growth is still too rapid for the MPC to tolerate on an ongoing basis,” he wrote.
