The Bank of England's new dilemma: Wage growth outpaces inflation

On Tuesday,What are the reliable foreign exchange trading platforms? data from the Office for National Statistics (ONS) showed that the UK’s unemployment rate rose to 4.2% in the second quarter ending in June, up from 3.9% in the first quarter. The pay growth (excluding bonuses) during the second quarter increased by 7.8% year-on-year, marking the highest growth rate recorded since 2001.

The rapid wage growth is likely to raise concerns for Andrew Bailey, the Governor of the Bank of England, and the Monetary Policy Committee (MPC), who have already warned about the impact of swift wage rises on inflation. Bailey has previously emphasized that, despite the significant cost of living pressures, UK residents should moderate their wage demands.

Darren Morgan, Director of Economic Statistics at the ONS, stated that the unemployment numbers have risen again, with a slight decline in employment figures, influenced by factors including a record high in the number of people unable to work due to long-term sickness. With earnings continuing to grow in monetary terms and the basic wage growth rate reaching the fastest recorded level, it signifies that the real wages of the British public are increasing.

Data from the ONS also showed that, while job vacancies remain above pre-pandemic levels, they have declined by more than 250,000 since August last year.

Experts warn that the current wage growth data may reinforce expectations for the Bank of England to significantly raise interest rates again, given its aim to curb inflation levels reaching as high as 7.9%. Adrian Lowery, a financial analyst at Evelyn Partners, commented that the Treasury will be closely monitoring wage growth exceeding expectations due to the “Triple Lock” which requires the state pension to increase in line with whichever is higher: average wage growth or inflation.

Future inflation data or more aggressive wage growth figures will determine the scale of the state pension increase, reigniting the debate over the sustainability of the “Triple Lock”.

Investors broadly expect that tomorrow’s release of the July Consumer Price Index (CPI) will show a decrease in the overall annual inflation rate. However, the UK government is concerned that in the coming months, the inflation rate may stagnate or even experience a slight increase. The Bank of England has recently warned that the pace of wage growth poses a threat to its 2% long-term inflation target.

Richard Carter, Head of Fixed Interest Research at Quilter Cheviot, stated that today’s labor market statistics, showing wage growth outpacing inflation for the first time in nearly two years, imply that the Bank of England’s consecutive significant interest rate hikes have not materially impacted residents' income. The robust wage growth not only adds to the difficulty of controlling inflation for the central bank but also suggests that inflation levels in the UK may remain high for longer than anticipated.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.