Rising Pay Increases to Pressure Bank of England

Main points

• Growth in Average Weekly Earnings including bonuses (AWE) was 4.2 per cent in the 3 months to November 2021, slightly lower than the 4.3 per cent that we predicted in December and compared with 5.0% in the three months to October
• We forecast private AWE to increase from 4.5 per cent in the 3 months to November 2021 to 5.6 per cent in the first quarter of 2022 because of improved pay settlements, higher starting pay and higher bonuses.
• With the current policy of moderation in public sector pay, we forecast public AWE growth to be stable between 2½ and 3 per cent until the first quarter of 2022.

"We expect to see a significant increase in the annual rate of pay increase early this year, While underlying pay increases should pick up moderately to 4.3% early next year, private sector Average Weekly Earnings, fuelled by bonuses, are likely to rise by 5.6%. With the trend rate of productivity growth in the UK only around half a percent, this would imply unit labour cost increases of 5%. Such a rapid increase is inconsistent with the Bank of England’s 2% inflation target and implies that interest rates will need to rise significantly.”

Cyrille Lenoël

Principal Economist, NIESR

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