Wage growth in the UK slowed in July as workers came under pressure from a renewed cost of living squeeze fuelled by the Iran war, highlighting the challenge for the Bank of England as it prepares to set interest rates. Figures from the Office for National Statistics (ONS) show average growth in total earnings, including bonuses, eased to 3.9% in the three months to July, down from 4.1% in the three months to June, matching the forecasts of City economists. The figure is expected to dictate the rise in the state pension this year under the triple lock, where the benefit rises by either 2.5%, inflation, or average wage growth, whichever is highest, each year.
Reflecting a cooling jobs market, the ONS said the number of workers on company payrolls continued to edge down, driven by a decline in jobs in the retail and hospitality sectors. Liz McKeown, the ONS director of economic statistics, said: “Vacancies remain at their lowest level outside the pandemic period for more than a decade, with smaller businesses continuing to report that increased labour costs are affecting hiring decisions.” It comes as the Bank considers its response to the rise in global energy prices triggered by the Middle East conflict before a crunch meeting on Thursday that will take place against a darkening global backdrop. City investors expect Threadneedle Street will keep the base rate on hold at the current level of 3.75%, although see the outside chance of a quarter-point rise to ward-off mounting inflationary pressures.
Financial markets anticipate at least four increases to 4.75% before the end of next year. The Bank has signalled that a weaker backdrop in the labour market could help limit the capacity for stubbornly high inflation becoming entrenched in the economy. However, oil prices have risen above $107 a barrel and British consumers have faced a jump in petrol and diesel prices.
Britain’s economy has performed more strongly than expected in recent months despite the impact from the Iran war. The latest snapshot from the ONS showed pay growth excluding bonuses remained unchanged at 3.5%, matching economists’ predictions. The headline rate of unemployment remained steady at 4.9%, confounding expectations for a modest rise to 5%.
Business leaders have criticised Labour’s higher taxes on employment and increase to the minimum wage for adding to a slowdown in the jobs market at a time when other costs are also rising for employers. Suren Thiru, the chief economist at the Institute of Chartered Accountants in England and Wales, said: “The ongoing drop in vacancies should set alarm bells ringing for the jobs market, as it suggests that demand for workers is wilting under the weight of soaring staffing costs, onerous regulation and increased automation. Official figures due on Wednesday are expected to show the headline rate of UK inflation rose above 3% in August, adding to pressure on households that have faced years of fast-rising prices after the lifting of pandemic lockdowns and Russian invasion of Ukraine prompted a cost of living crisis.
The Bank of England targets 2% inflation. Jake Finney, a senior economist at PwC UK, said: “This presents a dilemma for the Bank of England. With the jobs market remaining weak, it is difficult to see the case for raising interest rates.
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