‘Pay growth will cause the BoE some concern that the fires of inflation won’t be easily quelled’

As wages outpace inflation at the fastest rate for two years, Rob Morgan, Chief Investment Analyst at wealth manager Charles Stanley, explains the impact on the Bank of England and consumers.

Rob Morgan comments: “The Office for National Statistics (ONS) reported that average wages excluding bonuses were 7.7% higher than a year earlier in the three months to September.

July to September earnings growth without bonuses slowed only slightly to 7.7% from 7.8% in August, and with bonuses to 7.9% from 8.1%, despite a difficult economic backdrop.

What does it mean for households?

With the Consumer Prices Index (CPI) rising by 6.7% in the year to September 2023, and expected to record a significant leg down in October, employees are now seeing a turnaround in spending power. On average, earnings are now outpacing inflation at the fastest rate since the autumn of 2021 having previous lagged a long way behind.

This doesn’t fix the current cost of living challenges as the prior period of high price rises have taken a heavy toll on disposable income, but it’s a step in the right direction for many embattled households.

Other employment trends appear to be softer or stable. Job vacancies continue to fall away from the post-pandemic peak, by 58,000 on the quarter to 957,000. Meanwhile, unemployment was broadly unchanged at 4.2%. This paints a picture of a gradually cooling labour market with businesses keen to ensure they keep current employees on board with pay rewards, but increasingly cautious about hiring plans owing to the economic uncertainty ahead.

What does it mean for interest rates?

Wage growth is one of the key considerations for the Bank of England (BoE) when it comes to setting interest rates. The persistence of pay growth will cause the BoE some concern that the fires of inflation won’t be easily quelled and that interest rates will have to remain higher for longer.”