Yahoo Finance Record UK pay growth fuels fresh interest rate hike fears
Bank rate is expected to hit 6% by November, and at least 6.25% by next spring.
The pace of wage growth has ticked up further, fuelling fears that the Bank of England (BoE) will have to enact more aggressive interest rate increases to tame inflation.
Regular pay grew by 7.3% in the March to May period from year earlier, according to figures from the Office for National Statistics (ONS). That matched the highest level on record.
It comes as workers have sought pay rises in order to help keep up with the increased cost of living. However, despite the record increase, pay rises still lag behind inflation which currently stands at 8.7%.
The ONS also revealed on Tuesday that unemployment rose unexpectedly over the quarter.
It said the UK jobless rate jumped to 4% in the three months to May, from 3.8% in the previous quarter.
ONS director of economic statistics Darren Morgan said: “Total employment grew in the latest three months while the number of people actively looking for work also increased, both driven by men rejoining the labour market.
“Pay excluding bonuses has again risen at record levels in cash terms.
“Due to high inflation, however, the real value of weekly earnings are still falling, although now at its slowest rate since the end of 2021.”
Read more: Bailey hints at more Bank of England interest rate rises
Job vacancies fell for the 12th consecutive time, the ONS said, dropping by 85,000 in the April to June period to 1,034,000.
Chancellor Jeremy Hunt said: "Our jobs market is strong with unemployment low by historical standards. But we still have around 1 million job vacancies, pushing up inflation even further."
Both the BoE governor, Andrew Bailey, and the chancellor have warned wage restraint would be needed to bring down high inflation.
Bailey on Monday night warned that “both price and wage increases at current rates are not consistent with the inflation target.”
The concern is that strong wage increases will increase costs faced by companies and force them to push up prices for their goods even higher.
The BoE has raised interest rates 13 times in a row in an attempt to slow the pace of price rises.
In March to May 2023, average regular pay growth for the private sector was 7.7%, which is the largest growth rate on record (outside of the pandemic period).
Public sector pay grew by 5.8%, the fastest growth rate since autumn 2001.
TUC general secretary Paul Nowak warned that workers cannot pay the price to cool inflation.
He said: “The government must stop scapegoating workers for its failures. Wages are not driving inflation — they are not even keeping up with it.
“In the public sector and lower-paid private sector industries, pay is even further behind.
Read more: UK shoppers boost retail sales despite high prices
“Working families have suffered 15 years of falling living standards. Ministers shouldn’t be forcing households to become even poorer.
Markets have now all but fully priced in another hike in August at the next interest rate setting meeting.
Capital Economics UK economist Ashley Webb said: “With wage growth still well above the levels consistent with the 2% inflation target, this won’t ease the Bank of England’s inflation fears significantly.
“Our forecast is for the Bank to raise interest rates by 25 basis points in August, from 5% now to 5.25%, but we can’t rule out another 50 basis point hike.
“Much will depend on June’s CPI inflation data due next Wednesday.”
The Bank rate is expected to hit 6% by November, and at least 6.25% by next spring.
Watch: How does inflation affect interest rates?
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