Wages have risen at the fastest rate in more than 20 years, but are still unable to keep pace with inflation.
Average wages rose by 6.4% between September and November compared to the same period in 2021, according to the Office for National Statistics (ONS).
That means wages are growing at the fastest rate since 2001.
However, when adjusted for inflation, average wages fell by 2.6% in real terms.
“Wages have risen at an unprecedented pace outside of the pandemic, putting pressure on the Bank of England to raise interest rates again next month,” said Myron Jobson, senior personal finance analyst at Interactive Investor.
“However, the hottest inflation in nearly four decades has prevented many workers from fully reaping the benefits of rising earnings. Adjusted for inflation, total pay (including bonuses) and regular pay both fell by 2.6% year-on-year as rising prices continued to erode household purchasing power.”
This is one of the largest declines in real wages ever recorded.
Chancellor Jeremy Hunt said the figures showed that despite global economic challenges, “the UK labor market remains resilient with a record number of people on the payroll”.
He added that he was committed to halving inflation this year, currently at 10.7%, which would help people’s wages go further.
The gap between public and private sector pay has narrowed slightly, but remains near record highs.
Average wage growth in the private sector in the three months of November was 7.2%, compared to 3.3% in the public sector.
This is likely to trigger more wage demands by public sector workers and more industrial action as workers go on strike.
“A decline is still very likely”
Strong wage growth, plus a surprise 0.1% rise in GDP in November, may make it seem like the economy has turned around and a recession is unlikely.
However, Alice Hein, personal finance analyst at Bestinvest, believes the “double whammy of persistently high inflation and rising interest rates” will hurt households and businesses, meaning a recession is “still very likely, albeit a shallower one, to trigger a recession”. a little later than expected.”
Workers should also prepare for a wave of layoffs. Many businesses, faced with high inflation, have absorbed the rising costs as much as possible, but there are signs that some are starting to lay off staff or cut their hours. Unemployment and redundancy figures rose slightly, according to the ONS.
“With so many economic headwinds, job insecurity will become a bigger issue as 2023 progresses and households need to secure their finances for all eventualities,” notes Hein.
What does this mean for interest rates?
Strong wage growth will increase pressure on the Bank of England to raise interest rates at its next meeting on February 2. This will mark its 10th consecutive rate hike.
The consulting company Capital Economics believes that in the coming months the Bank may raise interest rates from the current level of 3.5% to 4.5%.
“We still think the labor market will eventually weaken. But, coupled with a more resilient economy than expected in November, these data will only reinforce the Bank of England’s fears that inflation is still lingering despite falling,” said Ashley Webb, UK economist at Capital Economics.
Rupert Thompson, chief economist at Kingswood, a wealth manager, believes a 0.5 basis point hike is on track for February, taking rates to 4%.
