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Business Surgery: Keith Senior, of Bury St Edmunds accountants Jacobs Allen, looks at the pressures wage growth puts on the economy

The latest inflation figures were announced last week, with the headline rate down to 3.2 per cent, slightly higher than predicted. Of course, that impacts what the Bank of England will do in terms of potential interest rate cuts. But other factors are a strong indicator of how the Bank will decide on its base rate, and one is wages growth.

The Office for National Statistics (ONS) has also recently released figures for that, which show that real wages (the rise in wages that is above inflation) have increased in the year to February 2024 by 2.4 per cent. Such increases indicate that there is more money available for spending and this in turn could drive inflation higher.

Wage growth ignoring inflation stood at 6 per cent to February, so if people don’t factor in what inflation is doing to their spending they could consider that they have more to spend by that factor.

Keith Senior, director at Jacobs Allen
Keith Senior, director at Jacobs Allen

Following those rates of change in February, the main National Minimum Wage rate rose on April 1, 2024, to £11.44 per hour, an increase of 9.8 per cent ignoring inflation. Clearly that is higher than the increase to February so we should expect to see even higher rates of real wage growth in the coming months, as many employees are paid at that basic rate. This could encourage the Bank of England to hold off reducing base rate for a while longer, waiting to see the real impact of these higher wage rates.

In conjunction with these statistics, the unemployment rate also rose in February to 4.2 per cent, which was higher than expected. And since then more data has been published in the last couple of weeks about long term absence from work due to sickness and particularly mental health issues. There is therefore a concern that higher costs of employment in a market with reducing productivity due to absences from work is leading to employers reducing staff numbers to cut costs, especially in the face of higher than hoped for interest rates.

So that cycle of cause and effect continues to reduce productive activity and real growth in the economy. With overall GDP increasing by only 0.1 per cent growth in February and GDP per capita still falling, there again is a concern that people will continue to feel caught in a cost-of-living crisis perhaps with lower wages for some becoming the norm.

Jacobs Allen
Jacobs Allen

It seems likely that the way out of this is for both employers and employees to concentrate on greater productivity, which is the only real way to move out of a recession or downturn and return to better economic growth for the country overall.

— Keith Senior is a director, Jacobs Allen Chartered Accountants