Will this wage increase prompt a rise in interest rates?

Richard Edgar

Former Economics Editor

Average earnings have increased by 1.3% in the year to September. Credit: PA Wire

Well, that’s interesting.

Alongside the strong employment numbers – another 112,000 jobs were added in the three months to September – wages are rising a fraction faster than inflation.

Basic pay (excluding bonuses) is up 1.3 per cent while inflation is 1.2 per cent (and falling). Is this a turning point?We’ve had one false dawn before but apart from a brief blip earlier this year, wages have been falling behind prices for five years.

More and more people have been coming off the dole and, as unemployment falls and companies start having to work harder to attract and retain staff, you’d expect pay to rise. It’s just taken a long time for this to happen.

I interviewed Nick Matthews, boss of Matthews Haulage in Hertford. Astonishingly, he hasn’t given his lorry drivers, warehouse and office staff a pay rise since the financial crisis knocked Britain into recession in 2008. But as he has taken confidence in the economic recovery, he hopes to be able to offer them higher wages next year.

That example may be a bit extreme (pay elsewhere in the private sector is growing around 2.3 per cent in September) but the Bank of England has been keeping a beady eye on pay because once it convincingly exceeds inflation and we feel a little better off, we’re likely to start spending more – pushing up inflation. To manage that, the Bank will start putting up interest rates.

Very shortly we’ll hear what the Bank expects on this front. It will publish its inflation report and we’ll be reading between the lines on what that means for interest rates.

Investors in the markets have already made their bets: sterling is trading strongly as traders reckon the wage data brings a possible rate rise sooner.