In work but feeling poorer. That is the experience of so many people in the UK today. Pay is rising - by as much as 7.2% a year in the private sector - but prices are rising at an even faster pace. Some firms have been offering their staff one-off bonuses to offset the impact of high and rising inflation but “real” incomes are falling, however you choose to measure them. Excluding bonuses and adjusted for inflation, average wages fell by 2.8% in the three months to May.
That’s a rare and painful decline in living standards - the most significant we have seen for twenty years.
In the public sector, things are particularly tough. Five million people have seen their annual earnings growth pegged at 1.8% while the annual headline rate of inflation has surged above 9%. The cost of living squeeze is so tight it may be forcing the “economically inactive” back into work. 225,000 people returned to the labour market in the three months to May but the overall level of inactivity remains higher than it was before the pandemic.
Economic growth in the UK is stagnating and the talk is of recession but many companies are still trying and struggling to recruit. The unemployment rate dropped to 3.6% in May - a near record low. There are more vacancies in the UK than there are job seekers.
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A tight labour market puts pressure on companies to increase pay to retain staff. It also puts pressure on the Bank of England to act more aggressively to contain inflation. There’s little evidence yet of the wage/price spiral that policymakers at the Bank fear. They will want to keep it that way. Economic activity to bound to slow further in the months to come as inflation rises and businesses and households are forced to belt-tighten.
The question is whether activity will slow enough to bring down inflation or whether the Bank will decide it needs augmenting.
Markets are betting on higher interest rates - that Bank rate will rise by 0.5% at each of the next three Monetary Policy Committee meetings (in August, September and November), reaching 3% by the end of the year. That’s an extraordinarily steep, recession-inducing, trajectory. Investors believe that inflationary pressure looks far more persistent than the Bank of England is suggesting. They may be wrong.
“The current pricing feels extreme,” says Ross Walker, Chief UK Economist and Head of Global Economics at NatWest. “For an economy that is teetering on the edge of recession this feels like an extremely aggressive amount of additional monetary policy tightening.
"The interest rate rises that the Bank has already delivered are only just beginning to be felt.”
Tonight, Andrew Bailey, the Bank’s Governor, will make a speech at an event at Mansion House. It will be interesting to see if he too signals that the market has got carried away.