Wage growth slows, but continues to outpace inflation

Wages are growing at the slowest rate in almost two years, but many households may still feel richer as pay growth continues to outstrip inflation. 

Regular wages grew 5.7% on an annual basis between March and May, down from 6% over the previous period. This is the lowest figure since June-August 2022, when wages were rising at a rate of 5.4% per year. 

The good news is that wages continue to rise at a faster rate than inflation. This has been the case since June last year, which means the pound in your pocket should be starting to stretch a little further.

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When adjusted for inflation (which has recently returned to the Bank of England’s 2% target), wages are growing at a rate of 2.5%. 

The bad news is that, although wage growth has been slowing, it remains higher than the Bank of England would like. This could encourage the Monetary Policy Committee (MPC) to keep interest rates on hold for a little longer.

The base rate is currently being held at a 16-year high of 5.25%. This has had a knock-on effect on mortgage holders and those repaying loans, as they have seen their monthly repayments soar. 

Is wage growth still too high?

The labour market is starting to loosen, with the number of vacancies falling and unemployment rising. However, the question is whether it is loosening enough to shift the Bank of England’s monetary policy stance.

“What continues to surprise is how wages have remained relatively strong despite the more fragile employment backdrop,” says Dan Coatsworth, investment analyst at AJ Bell. 

Although a slowdown in wages from 6% to 5.7% is a move in the right direction, at least as far as the Bank of England is concerned, it still looks pretty high. 

This comes on the back of recent concerns from the Bank of England’s chief economist Huw Pill, who warned about the persistence of economic indicators like services inflation and wage growth. 

The Consumer Prices Index (CPI) – the UK’s main measure of inflation – held steady at 2% in June for a second month after restaurant and hotel costs rose. Many have dubbed this the 'Taylor Swift effect' after the megastar’s Eras Tour hit UK soil last month, giving the hospitality industry a welcome boost.

Services inflation also remains high at 5.7%, which is a cause for concern given service industries account for 80% of the UK economy.

When will interest rates fall?

Many had been hoping for a summer rate cut at the MPC’s next meeting on 1 August, however it looks like this could be off the table. “Only around 35% of investors now expect the Bank of England to move,” says Richard Hunter, head of markets at Interactive Investor.

Coatsworth adds that “the Bank of England has a reputation for being conservative in its thinking, and there just isn’t enough in the latest round of data to warrant the Monetary Policy Committee breaking trend and cutting now.”

It is possible that the MPC will want to wait for the new Labour government’s first Budget before cutting rates, which have been held at 5.25% since last August. The MPC is responsible for acting independently, but any shift in fiscal policy could have a knock-on effect on inflation. 

The new government will be “changing policy, taxes and the fortunes of the UK economy, all of which play into the economic data the Bank scrutinises every month,” explains Laura Suter, director of personal finance at AJ Bell. 

“The MPC will likely want to examine any plans and the impact on inflation and other data before it makes the move to cut rates,” she adds.

Rachel Reeves has indicated her first Budget could be delivered as soon as September. The Bank of England has four remaining MPC meetings this year.