Wages increased at a faster rate than expected in May, putting pressure on the Bank of England to push up the cost of borrowing at its next meeting in August.
Earnings growth hit 7.3% in the three months to May compared with a year earlier, driven by the strongest rise in private sector pay growth outside the pandemic period of 7.7%, the Office for National Statistics said. It was the joint highest since modern records began in 2001.
City analysts had expected wage growth to ease to 7.1%. Pay growth was also revised up for the previous month to 7.3% from 7.2%.
Speaking at the Mansion House annual dinner in the City on Monday, the Bank of England governor, Andrew Bailey, and the chancellor, Jeremy Hunt, warned wage restraint would be needed to bring down high inflation.
The governor said current levels of price and wage increases were inconsistent with reducing inflation – now at 8.7% – to the government’s 2% target.
Despite the rise in headline wage growth, real pay when taking inflation into account was down 0.8%, the ONS data showed.
Mel Stride, the work and pensions minister, said in response to the figures that the government needed to “do the right thing” to bring down wage inflation by bearing down on public sector wage demands.
“What is really important, just as the Bank of England is doing its bit on the monetary side with higher interest rates, [is] that the government does the right thing with fiscal policy to accommodate that.
“And that does mean leaning into controlling wage growth wherever possible, principally in the public sector.”
The ONS said public sector wages rose in 5.8% in the three months to May while earnings jumped by 9% in the finance and business services sector, which covers jobs in the City, the accountancy and legal professions, advertising and marketing.
Paul Nowak, the general secretary of the TUC, said the government “must stop scapegoating workers for its failures”.
He added: “Wages are not driving inflation – they are not even keeping up with it. In the public sector and lower-paid private sector industries, pay is even further behind.”
Labour’s work and pension spokesperson, Jonathan Ashworth, blamed the government’s failure to provide skills training and help people back to work who left the labour market during the pandemic.
“Britain is the only G7 country with a lower employment rate than before the pandemic and real wages have fallen yet again – just as more and more families feel the devastating impact of the Tory mortgage bombshell,” he said.
Kitty Ussher, the chief economist at the Institute of Directors, said employers were under pressure to pay higher wages as they competed for skilled workers, despite a fall in the number of job vacancies from 1.3m to 1m since January.
The ONS data also showed the unemployment rate increased from 3.8% to 4% and employment growth fell back, indicating that the jobs market is cooling at a faster rate than forecast.
City analysts had expected employers to keep hold of workers despite a rise in the Bank’s base rate to 5%.
Some economists said the fall in vacancies and rise the jobless figures should persuade the Bank that higher interest rates were already dampening the economy.
Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said: “Signs that the labour market is loosening quickly bolster the case for the BoE’s monetary policy committee to stop its rate hiking cycle soon.”
But he conceded that the high levels of wages growth dampened the prospect that another interest rate increase in August could be prevented, which would mark a 14th consecutive rise.
Tony Wilson, the head of the Institute for Employment, said an increase in unemployment indicated that higher interest rates were beginning to take their toll on some employers, and large wage rises were likely to persist for many years without action from the government to bring more people back into work.
More than 2 million people say they want to work but are outside the labour force.
The UK is one of the few large European countries where the number of inactive workers has increased since 2019, leading to a drop in the employment rate.
ONS figures showed that, in the three months to the end of May, the situation improved after a rise in the number of people over the age of 55 who reported returning to work and a decrease of 2,000 in the number of people registered with a long-term illness.
However, the employment rate only increased 0.2 percentage points to 76%, leaving it 0.6 percentage points below its pre-pandemic level, largely due to the 420,000 extra people off work with a long-term illness compared with 2019.
