Investors bet on further interest rate rises as UK pay growth remains strong

The large gap between private and public sector pay growth adds further argument to unions who are demanding their members get a bigger pay rise, ITV News Deputy Political Editor Anushka Asthana reports

Many economists still expect the UK to end up in recession at some point this year, but there is no obvious sign yet that companies are starting to let workers go in significant numbers.

The number of redundancies has edged up, so too has the headline rate of unemployment, but both remain historically low.

And, last month, the number of people on company payrolls rose again to 29.9 million.

The spending power of households and businesses is being crushed by a combination of red-hot inflation and rising interest rates.

Although in an ideal world the government would find a way of supporting those who have left the workforce back into work - what's more likely is that the BoE will feel compelled to raise interest rates aggressively yet again to stamp down on demand for labour and try and tame rampant inflation

Economic activity is flat-lining, but, perhaps remarkably, the demand for labour remains very strong.

There are an abundance of vacancies in the economy and many businesses complain they are struggling to get the staff they need.

As a result, the balance of bargaining power stills sits firmly with the employee. Workers may not be getting the pay rises they would like, but wage growth (6.4%) looks incredibly strong.

Pay awards in the private sector are running at 7.2% - that's much higher than in the public sector (3.3%) and the fastest growth we've seen since records began in 2001.

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Although pay is not rising fast enough to prevent living standards from falling, it is rising with enough momentum to worry the Bank of England (BoE).

Just before Christmas, the Governor of the Bank, Andrew Bailey, said the risk of higher pay triggering another wave of prices rises was "quite pronounced".

As it stands, investors are betting that another interest rate rise is nailed on next month, possibly by as much as 0.5%.

The cost-of-living crisis is being felt in many countries and not just the UK.

Many of the governments here in Davos are trying to find ways of making sure this painful period is as short-lived as possible.

What is unusual about Britain’s position is we are one of the few countries where the workforce is smaller today than before Covid.

There are around 400,000 fewer people available to work in the UK than there were three-years-ago, partly due to ill-health and somewhat due to early retirement.

That's a very large number. Firms are having pay more to get the staff they need - which sounds like a good thing - but are funding higher pay by raising their prices, which is not a good thing.

In an ideal world, the government would improve the supply of labour by supporting people back into work. In a less-perfect world, the Bank would act to stamp down on demand for workers.