US Edition
Pay is rising too fast for the Bank of England to cut interest rates, economists have warned, after wages rose by 6.2pc in the year to December.
The rise in average regular pay was the smallest in more than a year, according to the Office for National Statistics (ONS).
However, it was still higher than the 6pc predicted by officials at the Bank, raising fears that interest rates will be higher for longer as officials ensure inflationary pressures are fully extinguished before lowering borrowing costs.
Following the pay data, traders in financial markets trimmed their bets on an early rate cut, with a reduction from the current level of 5.25pc to 5pc only now fully priced in for August’s policy meeting.
At the same time, the pound climbed to a six-month high against the euro. The pound has risen to €1.1744, up around 1.5pc since the labour market figures were released. It is also up against the dollar at $1.2650.
Andrzej Szczepaniak at Nomura predicted households and businesses will have to wait until the summer for any moves on borrowing costs.
He said: “Although Governor [Andrew] Bailey said that March was live for cuts, we think stronger-than-expected wage growth and a still tightening labour market support the Bank cutting only in August.”
The number of people kept out of the jobs market by long-term sickness remains near an all-time high, ONS figures showed.
One person in every 15 of working age – 6.6pc, equivalent to 2.8 million people – said ill health kept them from working or from looking for a job in the final quarter of 2023. The number was down only slightly on the 2.81 million suffering from long-term ill-health in the three months to November.
Hannah Slaughter, economist at the Resolution Foundation, said the scale of sickness was a significant drag on the country.
She said: “This is holding back the economy, putting pressure on the public finances and the NHS, and limiting opportunities for too many people. Reversing this trend will be a priority for the current and next government.”
Businesses are also struggling as a result, warned Jane Gratton at the British Chambers of Commerce.
She said: “To grow our economy we need more skilled, engaged and motivated people to contribute to the workforce in every part of the UK.
“Firms are still reporting difficulties finding skilled staff and the large number of inactive workers is concerning. Government must do more to remove barriers for people who want to work, including access to childcare, public transport, health support and training.”
Employers cut back bonuses before Christmas, meaning total earnings grew at the slowest pace since July 2022, at 5.8pc.
However, once falling inflation is taken into account, real earnings in the final quarter of the year increased 1.9pc compared with the same period of 2022. This marked the strongest growth in workers’ spending power since September 2021, before the cost of living struck and hammered the value of pay packets.
The number of job vacancies dropped to 932,000, the lowest since mid-2021, as employers cut back demand for staff.
There were 116,000 redundancies in the final quarter of the year, the highest number since the pandemic, also suggesting the economy is struggling. GDP figures to be published on Thursday will reveal whether the country has fallen into a shallow recession.
But there were signs of sustained strength in the jobs market, as the unemployment rate fell to 3.8pc, meaning 1.32 million were jobless.
Employment in the final three months of the year rose to 33.17 million, close to a record high, while economic inactivity, which measures those of working age who are neither in work nor looking for work, rose again to 9.3 million.
Jeremy Hunt, the Chancellor, said: “It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done. Our tax cuts are part of a plan to get people back to work so we can grow the economy – but we must stick with it.”
It came as inflation in the US fell by less than expected in January to 3.1pc in a blow to hopes that the Federal Reserve will soon cut interest rates in the world’s largest economy.
Analysts had predicted that consumer price rises would slow from 3.4pc in December to 2.9pc, but had underestimated stubborn pressures from higher housing costs, car insurance and medical care.