"Last week Bailey himself stressed that next week’s rate decision would be based on latest evidence – including wage data – as well as suggesting that we were only nearing the top of the hiking cycle"
Wage growth has caught up with inflation for the first time in over a year, the latest ONS figures show.
Annual growth in regular pay, excluding bonuses, was 7.8% between May and July, the same as the previous three-month period and the highest regular annual growth rate since comparable records began in 2001.
Financial services experts have now predicted that, unless inflation falls, the Bank of England will increase interest rates at its next meeting.
Derrick Dunne, CEO of YOU Asset Management, commented: “Today’s release is extremely bad news for The Bank of England, making another interest rate hike come 21 September almost inevitable. Last week Bailey himself stressed that next week’s rate decision would be based on latest evidence – including wage data – as well as suggesting that we were only nearing the top of the hiking cycle, rather than having reached it.
“For our part, we hope concerns around the UK economy’s ability to withstand higher interest rates for a prolonged period of time will offer The Bank pause for thought."
Nicholas Hyett, investment manager at Wealth Club, said: "Hawks will argue that inflation remains an ingrained problem within the UK. Wage growth remains strong, rising ahead of wider inflation, and government forecasts suggest CPI will tick up again in August. We think that means the Bank of England will add a few more turns to the interest rate screw before declaring it’s job done.”
Craig Fish, director at Lodestone Mortgages & Protection, added: "Unless we see a greater-than-expected drop in inflation data next week, a 0.25% increase in the base rate is widely expected. This is backed up by yesterday's comments from Catherine Mann who sits on the MPC, where she warned about the possibility of persistent inflation."
Today’s earnings growth figures also mean that the state pension triple lock should deliver a 8.5% increase next April. After last April’s 10.1% increase, this means a combined increase of almost 20% over two years.
Steven Cameron, pensions director at Aegon, commented: “Today’s official earnings growth figures mean state pensioners are on target for an inflation-busting 8.5% increase next April. With any breaking of the triple lock commitment vanishingly unlikely so close to a General Election, this should mean someone on the full new state pension of £10,600 a year will see their income increase by £901 to £11,501 or £221.17 a week. The Government typically gives official confirmation around November.
“The triple lock currently guarantees that the state pension will rise each April by the highest of three measures: earnings growth (including bonuses) as announced in September, inflation announced in October, or 2.5%. With inflation falling from its peak of 10.1% at the beginning of 2023 to 6.8% in July, it is looking increasingly likely that today’s earnings growth figure of 8.5% will be the deciding factor in next April’s state pension increase.
“The triple lock has been on a wild ride in recent years due to the high level of volatility in the economy and the unpredictability of both inflation and earnings growth. Looking ahead, all eyes will be on Party Manifestos to see what commitments are made for the next five years, something Rishi Sunak refused to comment on last weekend. The huge popularity of the triple lock amongst pensioners is balanced by the huge cost of funding it, which is met by the current National Insurance contributions of today’s workers. All parties must find a way to balance the books. One fairer and less unpredictable option would be to move away from a year-on-year comparison of earnings, inflation and 2.5% to one which averages out across say three years.”
While the state pension increase is good news for pensioners, the rise means that well over half a million more will start paying income tax for the first time.
Steve Webb, partner at LCP, explained: “Today’s figures for earnings growth are likely to mean a second successive significant cash increase in the value of the state pension, following on from this year’s 10.1% increase. Alongside a continued freeze of the tax-free personal allowance, this is likely to drag well over half a million more pensioners into the income tax net. Once again, ‘stealth’ taxation proves a convenient revenue raiser for the Chancellor.
"In terms of the triple lock policy, with a General Election in the offing it seems quite inconceivable that the Government would choose to break the triple lock promise for a second time in three years. Such a decision would be like aiming a laser-guided missile at the core of Conservative support and could fatally undermine the party’s electoral prospects.”