Wage growth has ‘passed its peak’ as Andrew Bailey prepares to address City on interest rates 

Workers returning to the jobs markets and boosting the volume of candidates available to businesses are poised to put a lid on wage growth, analysts are predicting official numbers this week will show.

Pay growth is said to have “passed its peak” after raging for more than a year, fuelled by staff demanding wage increases to compensate for inflation whittling away their finances.

Regular pay – which strips out bonuses and other one-off payments – is predicted by the City to have grown 7.1 per cent over the three months to May – Office for National Statistics (ONS) figures on Tuesday are tipped to unveil – down slightly from the 7.2 per cent jump clocked in the previous quarter.

“The peak in wage growth is now behind us,” Sanjay Raja, senior economist at investment bank Deutsche Bank, said in a note to clients last week.

Workers returning to the labour force from economic inactivity – when someone is out of a job and looking for one – is set to expand the pool of talent available to companies to hire, peeling back workers’ bargaining power and pushing down wage growth. Inactivity has risen sharply since the start of the pandemic.

Prices have been climbing at their fastest pace in decades for around a year and a half, prompting workers to tap the ear of their employers for a pay rise. Inflation has wiped out those pay increases for around 18 months.

Pay rose sharply in the previous quarter due to companies passing on the government’s near 10 per cent increase to the minimum wage.

There is concern that strong pay growth could embed high inflation in the UK over the long term. However, wages are not solely to blame for price pressures, with businesses’ costs also being driven up by higher energy and raw material costs.

Separate data from the ONS on Thursday is projected by analysts to show the extra bank holiday to celebrate the King’s coronation in May would have sent the UK economy into contraction.

“We expect GDP to have fallen by 0.4 per cent [month on month] in May,” consultancy Oxford Economics said.

Raja agreed, explaining: “An unwinding of industrial action to some extent should automatically boost GDP, partially offsetting the hit from the extra Bank holiday weekend.”

Britain has narrowly avoided an official recession – two back to back quarters of negative growth – so far this year, though experts have warned the Bank of England risks igniting one if it raises interest rates too sharply.

Governor Andrew Bailey will provide clues on whether the Monetary Policy Committee agree with financial markets’s expectation that interest rates will peak at around 6.5 per cent in his annual speech at Mansion House today.

Bailey and co have lifted borrowing costs 13 times in a row to a near 15-year high of five per cent and shocked traders last month with a 50 basis point increase.

Chancellor Jeremy Hunt will also speak at the annual bankers’ dinner.

Across the pond, fresh data on Wednesday is poised to show inflation is tumbling far below the UK’s rate to below four per cent.

UK inflation is stuck at 8.7 per cent, Core and services inflation is over seven per cent.