Higher wages overtake energy to become ‘biggest driver of price rises’

Business

Higher wages are the “biggest driver of price rises” for two-thirds of businesses, according to the findings of a report which will do nothing to ease worries at the Bank of England that inflation is coming under control.

The British Chambers of Commerce’s (BCC) economic survey of its members, covering April to June, showed that the pace of wage increases had become the biggest cost headache in the period, replacing energy bills.

The findings chime with the bank’s warnings about high wage settlements as it looks to get a grip on the country’s inflation problem.

After its shock 0.5 percentage point hike to bank rate last month, which took the rate to 5%, governor Andrew Bailey hit out at higher corporate profit margins and salary increases as contributing most to inflation’s stickiness.

The most recent consumer prices index (CPI) measure was unchanged at 8.7% while there was a surprise leap in the pace of so-called core inflation. which strips out the impact of volatile elements such as food and energy.

Financial markets now forecast bank rate peaking above 6% due to the core inflation data and the fact that wage growth is running at an annual rate of 7.2%.

While public and private sector operators are under pressure to attract and retain staff in the tight labour market and help workers with the cost of living crisis, the bank argues bumper pay packets are counterproductive.

Its mandate dictates it must raise the cost of borrowing to help get inflation back down to its 2% target.

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‘Current wage rises unsustainable’

The process of stifling activity in the economy through interest rate hikes is what has driven things such as fixed mortgage rates up – intensifying the squeeze on household budgets.

The BCC’s survey findings suggest there is a chance that wage growth has further to go as the official figures from the Office for National Statistics currently only cover up to April.

One bit of good news in the BCC report was that a minority (45%) of the 5,000 participants expected their prices to increase in the current third quarter of the year.

That compared to a 55% reading during the first three months of 2023.

BCC director general Shevaun Haviland said of the survey: “With inflationary pressures weakening, but wage cost concerns remaining high, our research should give the government and Bank of England pause for thought on their next steps. 

“There is a fine balancing act to be struck here. Push too hard on interest rates and there is a real danger that the long-term outlook for economic growth and prosperity will be dented.”

The government has a target to halve inflation this year but the current level is feeding jitters on whether it can be met.

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3:43

Average 5yr mortgage rates above 6%

A closely-watched economic indicator released earlier on Wednesday suggested the bank’s work was having an effect.

The S&P Global/CIPS purchasing managers index for June, covering the powerhouse services sector, showed that the pace of price growth was slowing and activity was at its weakest level since March.

Tim Moore, economics director at S&P Global Market Intelligence, said: “The service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand.”

However, he added: “Widespread increases in salary payments offset falling fuel bills and energy prices.”

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