UK wage growth still too hot to handle for the Bank of England

Real wages are growing at their fastest rate outside of the pandemic in over a decade. This is welcome news for workers, but less so for monetary policy makers looking for signs of inflationary pressures, the Resolution Foundation said today (Thursday).

The latest ONS labour market statistics show that wage growth has been resilient amid a cooling labour market. Real annual growth in regular average weekly earnings stood at 3.2 per cent in the three months to May 2024 – the fastest rate outside of the pandemic since 2002.

Looking at shorter term pay measures, the Foundation notes that pay growth has been picking up in recent months, with annualised quarter-on-quarter regular real pay growth rising to 5 per cent in the three months to May.

The Foundation notes that these decade-high levels of real wage growth are driven by both falling inflation and high nominal wage growth. In the private sector, regular annual nominal average weekly earnings grew by 5.6 per cent, and by 7.3 per cent on an annualised quarter-on-quarter basis.

The strength of pay rises is all the more surprising, says the Foundation, as it comes amid a backdrop of a cooling labour market and faltering productivity growth. So, while real-terms wage growth is welcome for workers, monetary policy makers will be concerned that higher pay rises could push up inflation in the coming months.

Ongoing issues with the quality of official labour market statistics make it hard to assess what is happening to employment levels. However, there are widespread signs that the labour market continues to cool, with payrolled employment growth slowing, vacancy and employment rates down, and unemployment up. The new government will need to turn this record around if it wants the labour market to help kickstart economic growth.

Greg Thwaites, Research Director at the Resolution Foundation, said:

“Pay packets are proving mightily resilient amid a cooling labour market – growing at their fastest rate outside the pandemic since 2002.

“Rising real wages are good news for workers coming out of the cost-of-living crisis. But the Bank of England will be concerned that because these are not productivity-enhanced pay rises, they could turn out to be inflation-generating ones. The high-strength pay data, and low-quality jobs data, further complicate plans to cut interest rates.”