Real Wage Growth Hits 25-Month High as Inflation Eases

Real wages have risen to their highest in over two years due to a significant decrease in inflation, with figures from the three months leading to October showing the quickest growth since September 2021. The Office for National Statistics (ONS) noted a 7.3% increase in basic pay from the previous year, although slightly lower than the revised 7.8% last month. This adjustment for inflation marks a 25-month high in real wages.

Unemployment rates remained stable at 4.2% during this period, based on ONS data. Darren Morgan, ONS economic statistics director, mentioned that employment figures have not changed significantly, with the job market and active/non-active job seekers maintaining similar ratios as the previous quarter. However, job vacancies are decreasing at a record rate, surpassing the post-2008 economic downturn period, yet they are still above pre-pandemic levels.

Although wage growth appears high, with potential signs of easing, the drop in inflation has ensured that wages continue to grow in real terms.

The Bank of England keeps a close eye on these developments, targeting a moderation in wage growth to reduce inflation toward its 2% goal. They firmly resist immediate interest rate cuts, arguing that inflation is still considerably high despite its fall from highs above 11%.

Energy Bill reductions contributed to the consumer price index (CPI) dropping from 6.7% to 4.6% annually in October. Consequently, financial markets now forecast an interest rate cut for the latter half of 2024, in line with the Bank's guidance.

The Bank aims for a significant deceleration in wage growth to counteract inflation and prevent high pay from increasing demand and inflating the economy further. A report by the Resolution Foundation predicts that declining inflation and job vacancy rates will lead to reduced wage increases in 2024.

The Bank of England's next move will be announced on Thursday when the monetary policy committee makes its interest rate decision. It is expected to maintain the Bank rate at 5.25% for the third meeting in a row, indicating no immediate drop in borrowing costs. However, the meeting minutes will be examined for any signs of a shift toward interest rate cuts.