Budget impact set to add to upward wages pressure
Rob Morgan, chief investment analyst at Charles Stanley writes: UK wage rises remained buoyant in the August to October period with annual growth in employees’ average regular earnings, including and excluding bonuses, coming in at 5.2%. This was well ahead of expectations and sees wages once again outpace inflation by a significant margin. The latest reading of CPI is 2.3%.
Gnawing problem of services inflation set to build
The jobs market continues to exhibit tightness with the unemployment rate remaining low at 4.3% and wage rises still elevated.
The increase in remuneration is well above what the Bank of England would believe is compatible with inflation falling concertedly under its 2% target. Buoyant wage rises add to household spending power and apply upward pressure to prices, and consequently there is an expectation rises will reaccelerate into the new year.
With wage inflation already a gnawing problem for the BoE, policies unveiled in the Budget add to the angst. With the minimum wage rising in April from £11.44 to £12.21 an hour, a cohort of lower earners are set to drive average remuneration, and spending power, upwards. Meanwhile, higher national insurance and wages will feed into company costs in the worker-heavy services sector in particular. There is also a potential ratchet effect of lifting wages more broadly with a read across to more senior roles.
Jobs data presents a confusing picture
The UK’s employment market is sending mixed signals. Although wages are buoyant according to ONS numbers, other survey data and reports from recruitment companies indicate more difficult times ahead with confidence falling and the pace of hiring slowly significantly.
What was subsequently unveiled at Rachel Reeves’ inaugural Budget certainly won’t have filled businesses with glee. With higher national insurance and wages set to erode bottom lines in the New Year, many owners will feel vindicated in reining in their plans while others will feel their push for expansion has been undermined.
It probably means a dampening of the jobs market going into 2025. There are now greater incentives for many companies to do more with less, or to control employment costs through scaling back hours worked, bonuses and benefits, or curtailing hires. However, as today’s data indicates, there are still significant rewards in the workplace for those with in-demand skills, indicating a bifurcated jobs market of winners and losers.
What does it mean for interest rates?
The blowout wages number pretty much extinguishes any remaining hopes of a further interest rate cut from the Bank of England this Thursday. Policymakers will want to see a considerable easing in earnings before they are convinced price pressures are receding, and that stubborn services inflation is truly vanquished.
All eyes will be on November’s inflation figures which come out tomorrow. It may represent another interesting test case of the extent to which buoyant wages are being absorbed by companies or passed onto consumers via higher prices. This could help the BoE ascertain what the effect will be of higher minimum wages and national insurance costs when they take effect in the New Year. Overall, the Budget has been widely interpreted as adding to inflationary risks, piling costs onto companies, especially, in the hospitality sector. This could drive higher prices in the services component of the inflation numbers in particular.
The slower trajectory of interest rates cuts factored in since the aftermath of the Budget, with just four 0.25% reductions priced in by the end of 2025, continues to look plausible given the evolving backdrop.
