Why wages in the UK are very strong?

UK wages strength is a puzzle of economists – and an increasing problem for Policy makers at the Bank of England.

High inflation and labor deficiency on a large scale and a wave of public sector strikes has led to growth in the average UK’s nominal profits to a high degree of 8.3 percent in the summer of 2023. Since then, the economy has stopped, vacancies and employers put the brakes upon employment. Productivity, specified in the long term of wages, has decreased since 2023.

However, the average profits in the three months until January were still 5.9 percent higher More than a previous year – surpassing inflation for more than a year and a half.

The largest wage package is a batch of family financing but also anxious to the Bank of England, which sees the current rates of wage growth as inflationary, unless it is supported by better productivity.

Thus, understanding what is going on is very important for interest rate expectations.

Is wage growth really so strong?

The Monetary Policy Committee at the Bank of England reduced the latest official wage data, as it announced its decision to leave interest rates Unchanged In 4.5 percent on Thursday.

She said that an increase of 6.1 percent in the average weekly profits in the private sector may be fed by some sectors, as wage growth was often volatile. Other indicators were in line with the estimation of the Bank of England, published in February, from the growth of the latent wages above 5 percent.

But this still means wage growth is “high and above what can be explained by economic basics.”

MPC added that one of the main risks that you will focus on in the previous meeting is “the extent that can be more stability in local wages and prices.” Other risks that I developed were geopolitical tensions that push the economy to a deeper shrinkage.

Will the growth growth decrease?

Wage growth appears to be slow during the next year. Official data show moderate payment pressure in the past two months. BOE surveys, and the data collected by the BRIGHTMINE Research Organization, indicate that employers will offer payment prizes for current employees between the ages of 3 and 4 percent in 2025.

Bank of England’s dealerships found that some employers will pressure the payment prizes by 1 to 2 degrees Celsius to compensate for the impact of higher salary taxes from April.

But Rob Wood, UK’s chief economist in the overall economy consulting consulting, said this will continue to leave profit growth above 4 percent on the ONS scale – which is very high that it does not agree while maintaining inflation on the target by 2 percent, in the absence of increased productivity.

What leads him?

One of the possible factors is a series of large increases in the minimum legal wages. This usually does not affect the average profits. But employers, like the next two retail seller, warned of a “ripple effect”, which raised employees ’wages the highest level to ensure that there are still incentives for progress.

The change in the functional mixture in the economy can be part of the interpretation. The data released on Thursday shows that employment has decreased in the low -wage retail sector during the past year, while more people are employed in professional areas and financial services.

But Xiaowei Xu, chief economist in the field of research at the Institute of Financial Studies, which is suffocating thinking, said that these factors can only explain a “small part” of the separation between wage growth and the state of economics.

An additional possibility by the Governor of England and Andrew Billy – that productivity growth may not be great as official data – does not persuade economists.

“As if”, Greg Thawitz, Director of Research at the Decision Corporation, wrote Blog.

Why does the Bank of England feel anxious?

The large concern for the Bank of England is that something has changed in the structure of the British economy, which means that workers and employers are now adoking with a “new natural”, as wages grow at 3.5 or 4 percent a year, and inflation hovers to 3 percent.

“This will be more expensive to change if it becomes firm,” Claire Lombardly, the Deputy Governor of the Bank of England, warned at the end of 2024.

Wood argues that this is already happening and that policymakers are “very optimistic” about a noticeable rise in family expectations for five years and 10 years.

He pointed out that the increase of the annual wage of 3 percent has become record in the years preceding the roaming epidemic, and the annual wage increased by 3 % as standard because people expected inflation to 2 percent over time. Now, “Families expect England not to do anything at all … and allow inflation to run over the target forever.”

Why do not families spend?

The additional puzzle is the reason that real wage gains do not promote consumer spending yet. Official statistics indicate that retail sales and total home consumption are still less than a prenatal level, as people provide a historically high share of their income.

Analysts say that spending should be picked up as soon as families were rebuilding the temporary warehouses that were exhausted during the epidemic. But people are still worried about the high costs of food, energy, housing, discount threats in jobs, public spending, talking about commercial wars and redemption.

Sandra Horsfield, an economist at the Investtec Investment Bank, said that the need for high defense spending will be “worrying” for consumers in the United Kingdom, as well as threatening American definitions that make people “ask how the general economic situation (UK) will happen.