Why is British wage growth so strong?

The strength of British wages is a mystery to economists – and a growing problem for the political decision -makers of the Bank of England.

Increasing inflation, widespread shortage of workers and a wave of strikes from the public sector put a record high of 8.3 percent in a record high of 8.3 percent in the summer of 2023. Since then, the economy has come to a standstill, the vacancies have fallen and the employers have set brakes. Productivity, the long -term determinant of wages, has been falling since 2023.

But average income in the three months until January were still 5.9 percent higher As a year earlier – and has exceeded inflation for more than a year and a half.

Larger wage packages are a thrust for household finances, but also a concern for the BOE, in which current wage growth lists the rates of wage growth as inflationary, unless they are underpinned by better productivity.

Understanding what is going on is therefore crucial for the prospects for interest rates.

Is wage growth really as strong as it looks?

The Boe money committee has downplayed the latest official wage data while announcing her decision to leave the interest rates unchanged at 4.5 percent on Thursday.

An increase in the average weekly income of the private sector by 6.1 percent was fueled by some sectors in which salary growth was often volatile. Other indicators contrasted the Boe estimate published in February with the underlying wage growth over 5 percent.

However, this still means that wage growth “at an increased level and above what could be explained by economic foundations,” said the MPC.

The MPC added that one of the two main risks that she would concentrate on in the run-up to his May meetings was “the extent that could be more mastery of domestic wages and prices”. The other risk that it marked consisted of geopolitical tensions that pushed the economy into a deeper downturn.

Will salary growth fall?

Wage growth seems to be slow in the coming year. Official data show that wage pressure moderates in recent months. The Boe’s own surveys and the data from Brightmine collected by the research organization suggest that employers will pay between 3 and 4 percent between 3 and 4 percent in 2025.

Some employers will squeeze the salary prices by 1 to 2 percentage points in order to compensate for the effects of higher salary billing taxes from April, as the Agents of the Boe found.

But Rob Wood, Chef -Uk economist at the consulting pantheon macroeconomics, said that this would probably still leave profit growth over 4 percent in relation to the ONS measure -to keep inflation to 2 percent to 2 percent without higher productivity.

What is it going?

A possible factor is a number of large increases in the statutory minimum wage. As a rule, this does not affect the middle income. Employers like the next have warned the next retailers about a “Ripple effect” and increased wages for employees higher on the scale to ensure that there are still incentives for progress.

A change in the mixture of jobs in the economy could also be part of the explanation. Data published on Thursday show that employment was in low -wage trade last year, while more people are employed in professional areas and financial services.

But Xiaowei Xu, Senior Research Economist at the Institute for Financial Studies, a think tank, said these factors could only explain a “tiny break” of separation between wage growth and the condition of the economy.

Another possibility of the governor of Boe, Andrew Bailey that productivity growth may not be as bad as the official data – the economists are not convincing.

“How would it be,” wrote Greg Thwaites, research director of the Resolution Foundation Think-Tank, in one recent Blog.

Why is the Bank of England worried?

The big concern for the Boe is that something has changed in the structure of the British economy, which means that employees and employers are now adapting to a “new normality” in which wages grow at 3.5 or 4 percent per year and inflation is 3 percent.

“That would be more expensive to change if it were anchored,” warned Claire Lombardelli, deputy governor of Boe, at the end of 2024.

Wood argues that this has already happened and that the political decision -makers are “much too sanguine” on a significant increase in the inflation expectations of households five and 10 years in advance.

In the years before Covid pandemic, annual salary increases of 3 percent were standard, since people have expected inflation to an average of 2 percent over time. Now “the households expect the Bank of England to do absolutely nothing … and the inflation runs well above the finish forever.”

Why do households give no expenses?

An additional puzzle is why the Realmes wages do not yet increase consumer expenses. Official statistics show that both retail sales and the general budget consumption remain under their pre-pandemic level and that people save a historically high proportion of their income.

Analysts say that the expenditure should pick up as soon as the households have rebuilt buffers that were exhausted during the pandemic. But people are still worried about rising foods, energy and housing costs, threats from cuts for jobs and public expenses and the conversation of trade wars and reconstruction.

Sandra Horsfield, economist at Investment Bank Investec, said that the need for higher defense expenditure for British consumers would be “worrying”, as well as the risk of US tariffs that “ask people how the (British) general economic situation will do”.