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Saturday, May 31, 2025

Cost of living: Higher wage growth suggests another interest rate rise is on the way

Cost of living: Higher wage growth suggests another interest rate rise is on the way

Sky's Gurpreet Narwan explains why the Bank of England is likely to be concerned by the pace of wage increases revealed by official employment figures.
Wages are rising but everyone is unhappy.

That is because pay for workers is not rising quickly enough while policymakers are worried because pay is not slowing quickly enough.

It encapsulates the problems facing the UK economy.

While the government and the Bank of England are desperately trying to suppress inflation, workers are fighting to maintain their living standards.

Unfortunately, the Bank fears the two are incompatible. If workers get the pay rises they want it could further fuel inflation.

The latest official figures show nobody is getting what they want.

Wages, when the effects of bonuses are stripped out, rose by 6.6% in the three months to February, compared to the same period last year.

That was unchanged from the previous three-month period and considerably higher than the slowdown to 6.2% that economists were forecasting.

Total pay was up by 5.9% - rising from 5.7%.

Wage growth is proving too stubborn for the Bank, which wants to see signs of a slowdown before it cuts interest rates.

This shouldn't take too long now that unemployment is rising.

Samuel Tombs, an economist at Pantheon Macroeconomics, said the latest data had "raised the chances of the MPC hiking Bank Rate again next month; a further 25 basis point now looks like a toss-up," he wrote.

So, households and businesses could be hit with more interest rate rises at a time when society is getting poorer because wages continue to lag inflation.

The headline rate of inflation is currently at 10.4%.

It means that, when adjusted for inflation, real pay fell by 2.3% over the same period with public sector workers bearing the brunt of the slowdown.

This tension is at the heart of the industrial action sweeping the nation.

The country lost 348,000 days to strike action in February and, with living standards continuing to fall, the figure is only likely to rise.
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