Record wages growth yesterday put the Bank of England under more pressure to raise interest rates.
Pay excluding bonuses shot up by 7.8% compared to June last year, with pay including bonuses touching 8.2%, the highest figures since records began in 2001.
City analysts are convinced bank rates will be hiked from 5.25% to at least 5.5% when the Bank’s Monetary Policy Committee meets next Monday.
The rise will drive some mortgage rates above 6% and CMC Markets analyst Michael Hewson said wage inflation had “not just given the central bank a headache, but a migraine.”
Stock markets reacted badly to the news with the FTSE 100 index down more than 1.5%, wiping £30billion off the value of the UK’s biggest companies.
In spite of the wage hikes, official statistics showed that the jobs market is cooling with unemployment in the UK increasing from 3.9% to 4.2% in the three months to June.
The number of vacancies also fell for the 13th month in succession, dropping 66,000 to 1,020,000.
The number of people who are economically inactive because of long-term sickness is now at a record 2.5 million – up 400,000 since the start of the pandemic.
Figures due out today were expected to show further significant falls in inflation.
The Prime Minister sought to reassure yesterday as he said there is “light at the end of the tunnel” for the cost of living crisis due to an expected fall in inflation.
Rishi Sunak said yesterday the Government will “stick to the plan” as he seeks to meet his pledge to halve the inflation rate this year.
He said: “The best way to be able to bring interest rates down and stop them going up is to bring inflation down. That’s why my first priority of my five priorities is to halve inflation.”
“We are making progress, the last set of numbers we had showed that inflation was falling faster than people expected.”
“We’ve got work to do, we’ll get more numbers tomorrow, but it’s important that we stick to the plan.”
“The plan is working. I think there is light at the end of the tunnel.”
“If we get through this, people will really start to see the benefit in their bank accounts, in their pockets, as inflation starts to fall.”
Economists expect Office for National Statistics (ONS) data to reveal Consumer Prices Index inflation of 6.7% for July, down from 7.9% in the previous month.
From the start of July, the average price of electricity charged to consumers was slashed to 30p per unit, while gas prices fell to 8p per unit, meaning the average annual energy bill for a household dropped to £2,074 from the capped rate of £2,500.
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Food and core goods inflation have also both slowed, according to latest industry survey data.
Laura Suter, head of personal finance at AJ Bell, said: “Homeowners’ fortunes rely heavily on what the next inflation reading tells us.”
She went on: “The higher wage growth figures are a fly in the Bank of England’s ointment, as it could well translate to more consumer spending.”
“If inflation doesn’t slow as fast as the Bank is planning, that leads them down the path of higher rates once again. It’s a financial merry-go-round that mortgage holders just want to get off.”
“The next question on mortgage holders’ lips is when will rates be cut? “
“Next summer is likely to be the soonest we see any rate cut, meaning that those re-mortgaging in the next 12 months are likely to still face a financial shock when they come to re-finance.”
Data yesterday from analysts at Kantar recorded that the price of groceries slowed for the fifth consecutive month in the four weeks to August 6 – but at 12.7% higher year-on-year it was significantly ahead of wage inflation.
James Smith, developed markets economist at ING said the Bank of England was “nailed on” to increase interest rates in September.
He said: “Overall, despite the apparent weakening in hiring and ongoing improvement in worker supply, the Bank will remain focused on wages.”
“When it comes to CPI figures, we think there’s some scope for a positive surprise, but ultimately a September rate hike still looks nailed on.”
The ONS data also showed the number of payrolled employees increased by 97,000 to 30.2 million in July.
Chancellor Jeremy Hunt said: “Thanks to the action we’ve taken in the jobs market, it’s great to see a record number of employees.”
“Our ambitious reforms will help even more people into work, including by expanding free childcare next year, helping to deliver on our priority to grow the economy.”
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