Easing pay pressure will not halt rising interest rates

There was evidence of some respite in May when the Office for National Statistics (ONS) reported a 136,000 fall in the number of workers on UK payrolls between March and April, the first reduction since February 2021. This provisional data was taken as a sign that the flatlining economy was finally cooling demand in the jobs market, with unemployment up by a small but surprising tick at 3.9%.

But just four weeks later all of that had changed. The previous large drop in employee payroll numbers was revised away to a gain of 6,822, followed by a further 22,879 in May. Overall pay growth excluding bonuses accelerated to 7.2%, the highest ever recorded outside the pandemic, with wages across new positions offered during the three months to April up 10% on the same period a year earlier and unemployment dropping back to 3.8%.

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Energy has been a major part of the inflationary story in the UK, which relies heavily on gas for power generation and home heating. Consumers have been hit hard by the generally poor energy efficiency of housing stock, which accounts for about 20% of the UK’s carbon emissions and is hampered by a lack of proper insulation to stop heating from blowing away in the wind.

But the surge in last year’s energy prices is now dropping out of inflationary calculations. While bills have in no way returned to pre-crisis levels, the nature of annual comparisons means that inflation will naturally fall. This in one of the main reasons Prime Minister Rishi Sunak boldly pledged to “halve inflation” to 5% by the end of this year – it looked like an easy win.

But the knock-on effects on domestically-generated price pressures are proving difficult to tame, leaving policymakers at the Bank of England concerned about a lasting increase in wage demands and business pricing strategies. Andrew Bailey, Governor of the BoE’s Monetary Policy Committee (MPC), said openly for the first time last month that the UK is now battling against a wage-price spiral as headline inflation remained stubbornly stuck at 8.7% in May.

With energy bills easing, the Prime Minister's promise to 'halve inflation' looked like an easy win (Image: Justin Tallis/PA)

Yet figures released yesterday in the latest monthly report on jobs published by KPMG and the Recruitment & Employment Confederation (REC) suggest that 13 consecutive interest rate hikes by the MPC since December 2021 are beginning to take effect, with a sharp upturn in candidate availability and the pressure on starting salaries beginning to ease.

Less hiring activity and an increase in job redundancies led to a fourth consecutive increase in the number of available candidates in June, the REC said. The upturn in numbers was the sharpest since December 2022.

Meanwhile, growth in starting pay for both permanent and temporary workers rose at a much slower rate than in previous months, with starting pay at its softest since April 2021. Total vacancies expanded at the slowest pace in 28 months as uncertainty over the economic outlook weighed on hiring decisions.

“There was a significant step up in the number of candidates looking for a new permanent or temporary roles,” said Neil Carberry, chief executive of the REC. “This is likely driven by people reacting to high inflation by stepping up their job search, and by some firms reshaping their businesses in a period of low growth.

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“It’s no surprise, therefore, that the rate at which wages are rising has dropped again.”

Data from the ONS lags other leading economic indicators, so the trends reported by the REC will not be fully reflected in today’s official unemployment figures covering the three months to the end of May.

But even if shadows in the headline data hint that the red-hot labour market is cooling, Mr Bailey and most of his MPC colleagues will unlikely be moved from their current aggressive course of raising interest rates to stamp out inflation. Given the hefty revision to April’s provisional payroll data, it is understandable if committee members are dubious when it comes to preliminary data.

The link between core inflation and high wage growth in the services sector has become established: the Bank’s favourite measure of wage growth, private sector regular pay, accelerated to 7.6% in the three months to April. Though this was partly a result of the near-10% increase in the national minimum wage that month, the pick-up was broadly based with sectors that do not tend to employ many lower-paid staff reporting strong pay pressures.

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There’s also the optics to consider. The BoE’s credibility in handling one of its core tasks – keeping inflation around the 2% mark – has been undermined since it failed to act throughout most of 2021 to increasing price pressures as the UK and global economies came out of Covid lockdowns. The prevailing view that the initial burst in inflation was a passing phase in the recovery from the pandemic left policymakers far behind the curve when the Russian invasion of Ukraine sent energy prices into the stratosphere.

The latest decision maker panel from the BoE – a survey of financial officers from UK companies of all sizes from all sectors – continues to point to more muted price pressure in the corporate sector. Other leading indicators further show that producer price inflation has come down dramatically in recent months.

But having voted in June by a majority of 7-2 to lift rates by 50 basis points to 5%, the MPC has clearly lost patience and confidence in these forward-looking measures. Nothing short of a full-scale collapse in today’s unemployment figures will put a halt to at least a couple more hikes in interest rates.