Bosses hold up wage growth expectations amid inflation tensions
Company bosses have cut their wage growth expectations for the year ahead, Bank of England data has suggested, with inflation pressures on Britons easing.
Finance chiefs across private sector firms are set to raise wages by smaller amounts than seen in the last year, which could sway some Bank policymakers to lower borrowing costs further.
The Bank’s decision makers’ panel survey in December showed that annual wage growth for the year ahead was 3.7 per cent, a slight rise on the previous month’s data collected by economists.
It suggests that firms expect wage growth to decline by some 0.6 percentage points over the next year after firms reported annual wage growth had been 4.3 per cent in December.
The lack of a drop in wage growth expectations is likely to make interest rate-setters at Threadneedle Street uneasy about loosening monetary policy.
Officials including Clare Lombardelli and Huw Pill have argued that high wage growth has pushed firms to raise prices to keep up with workers’ demands, prompting them to vote against interest rate cuts to bring inflation back to 2 per cent.
Consumer price index (CPI) inflation slowed to 3.2 per cent in the 12 months to November, undershooting the Bank’s expectations.
City analysts have forecast inflation to fall at a faster pace this year given Rachel Reeves’ decision to strip energy subsidy costs from utility bills from March.
Budget decisions could reduce inflation by as much as 0.5 percentage points, Bank officials suggested, though there are some tensions around high inflation expectations among consumers.
The Bank’s DMP survey showed firms predicting price inflation for their own products to be 3.5 per cent for the year ahead, the same level as in November.
Wage growth dilemma for Bank
In more concerning numbers, employment is also expected to continue to decline at a faster pace as data was at its weakest point outside of the pandemic.
Pantheon Macroeconomics’ chief UK economist Rob Wood said Bank policymakers may not read the latest set of data as a green light for a string of further interest rate cuts this year.
“The MPC will have to be cautious, so we are comfortable assuming only one more rate cut this year,” Wood said.
“Wage and price pressure remain stubborn. Firms’ expected price hikes have been stuck in a 3.5 per cent – 4 per cent range for 19 months now, and realised pay is trending sideways too, suggesting that the slowdown in official pay growth is over for now.”