Ahead of tomorrow’s UK inflation figures policy makers were reminded that wage pressures remain strong suggesting a wage-prices spiral is still a threat.
Average earnings, excluding bonuses grew by 6.7% in October to December, data from the Office for National Statistics (ONS) showed, meaning with inflation still in double digits most workers’ are suffering a real terms pay cut.
The number remains historically strong and will make uncomfortable reading for the Bank of England’s rate setters as they try to tame soaring inflation.
Workers in the private sector saw a boost of 7.3% to their pay, while the strike-engulfed public sector saw a more muted increase of 4.2%.
The ONS said: “For regular pay, this is the strongest growth rate seen outside of the coronavirus (COVID-19) pandemic period.”
Neil Wilson, chief market analyst at markets.com commented: "About that disinflation...UK wage growth has accelerated - I'm not sure if you can call it a wage price spiral yet or not....but remember the same people who told you inflation would be brief and transitory are saying they don’t see the dangers of a wage price spiral."
But there may be hope the horizon. Simon French at Panmure Gordon expects “real pay declines should give way to real pay growth by H2 as headline inflation falls away fast from July.”
However, this gain could be offset by higher interest rates although the City is split as to how high borrowing costs will go.
Capital Economics thinks the Bank of England will be increasingly concerned about the persistence of domestic inflationary pressures as private sector wage growth exceeded its forecast.
It expects the Bank to raise rates to a peak of 4.5% over the coming months.
But Samuel Tombs at Pantheon Macroeconomics continues to think that the Monetary Policy Committee (MPC) will be able to keep Bank Rate at 4% over the coming months.
“It still is far too high for the MPC to tolerate long-term, but it should slow further, as labour market slack builds, job-to-job flows decline, and CPI inflation and inflation expectations continue to fall,” he explained.
Martin Beck, chief economic advisor to the EY ITEM Club, suggested “The latest numbers mean the odds of the MPC going for one further rise in Bank Rate in March, before pausing, have likely increased,” and ING Economics agreed.
They noted there's little sign that UK wage growth has reached a peak, and the jobs market looks reasonably healthy. “A 25bp rate hike at the March meeting seems likely,” they said.
Economists may be hoping tomorrow’s inflation figures add further clarity to the situation.