British Wages (And Wallets) Are Swelling

British Wages (And Wallets) Are Swelling
Paul Allison, CFA

8 months ago2 mins

What’s going on here?

Fresh data out on Tuesday showed that British wages are swelling faster than anyone expected.

What does this mean?

While the rest of Europe and the US are witnessing a welcome chill in price hikes this summer, the UK is caught in what cricketing Brits might call “a sticky wicket”. See, the country’s unable to shake the inflation monkey clinging to its back – and record wage growth of 7.3% in the three months to May isn’t exactly helping. Those higher wages prompted the head honcho of the Bank of England (BoE) to take to the stage at an event in the City of London, urging financiers to show a little restraint when it comes to pay. But let’s not kid ourselves: they’re not a crowd known for their frugality, and so far, the BoE’s pleas seem to be falling on deaf ears.

UK wages

Why should I care?

The bigger picture: The Phillips fillip.

There are some comforting signs buried in the data release, mind you. Unemployment unexpectedly ticked up to 4% in the three months to April, and job vacancies kept on sliding – and that could be a game-changer in the battle against inflation. See, it boils down to what’s called “the Phillips curve” – a model suggesting that inflation should drop when unemployment climbs. If that theory holds water, then this rise in unemployment could become the hero in the ongoing inflation saga.

UK unemployment

For markets: The BoE’s playing Jenga.

UK rate-setters are in a bind. They know higher rates can tame inflation, but each hike is a gamble – risking the stability of the pension fund industry, banks, or even the entire economy. And with UK rates already at 5% and wages still heating up, it’s looking like rates may need to climb even higher. So hold onto your hats this August, when the BoE’s set to meet for yet another high-stakes interest rate debate.

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