UK wage growth surges, raising concerns about inflationary pressures
2 min read . Updated: 19 Apr 2023, 07:27 AM IST
PremiumThe average earnings in the UK unexpectedly rose 6.6% in the three months to February, higher than the 6.2% predicted, causing concerns about inflationary pressures and possible interest rate hikes.
The UK’s average earnings, excluding bonuses, increased unexpectedly by 6.6% in the three months through February 2023 compared to the same period last year, according to the Office for National Statistics. The reading is higher than the 6.2% growth rate economists had predicted and has led to concerns about inflationary pressures in the country.
The Bank of England (BOE) is expected to keep a close eye on the situation as it prepares to release a report on consumer prices tomorrow. BOE Governor, Andrew Bailey, and his policy-making team had hoped for a cooling of pay growth and inflation.
Goldman Sachs, which had predicted no change in interest rates through next year, now expects a 25 basis-point hike in May. Similarly, Bloomberg Economics anticipates a rise to 4.5% next month. Investors are already expecting at least 50 basis points of tightening by September following the unexpected surge in wages.
The jobs market shows some signs of loosening as more people returned to the market, resulting in an unexpected rise in unemployment from 3.7% to 3.8%. However, a key wage metric watched by the BOE, annualised private-sector wage growth, is still above 5%, a level economists say is inconsistent with the BOE's 2% inflation target.
James Smith at ING Developed Markets believes that “a similar blowout in services inflation tomorrow would probably be enough to lock in another 25bp rate hike next month". Meanwhile, Stuart Cole at Equiti Capital suggests that the data “do nothing to assuage concerns on the MPC about the threat of a wages/price spiral," and that the information "should be enough to seal another hike in interest rates" in May.
The two-year gilt yield was up 5 basis points at 3.66% as of 1 p.m. London time, while the pound advanced 0.6% to $1.2446.
Tomorrow’s report on consumer prices will be crucial in determining whether the BOE will need to continue with its most aggressive series of rate rises in four decades. The CPI result is expected to show the first reading below double digits in seven months, but a strong services inflation reading could lead to another rate hike.
(With agency inputs)