Wage demands could make it harder to avoid UK recession

MARKETS, consumers and quite possibly the Bank of England (BoE) may breathe a sigh of relief this week as UK inflation holds steady at 6.7% and UK wage growth shows signs of slowing, albeit marginally.

- Daniela Sabin Hathorn

Markets were fearing another rise in the average earnings index, which measures the change in salaries in the past month. A rise would suggest UK employees are demanding more compensation for their work. However, the Office for National Statistics (ONS) said on Tuesday that average total pay rose 8.1% in August, down from 8.5% the previous month.

Despite that, average wage growth is still close to record highs in the UK. So while data this week might suggest the BoE hold its rate-hike lever steady, wage pressure continues to stand in the face of its commitment to bring inflation down to its 2% target.

So why all the fuss about wage growth? In theory, a rise in earnings is a good sign as it gives a picture of a healthy and growing economy. However, in the present inflationary environment, higher wages only serve to add more fuel to the “inflation” fire. A rise in wages is one of the primary drivers of domestic inflation, because it puts more money in people’s pockets. This then increases spending on goods and services, even if the rise in wages is in some way meant to offset the higher cost of living.