UK unemployment rises as wage growth catches up with price rises

Office for National Statistics says regular pay rose by 7.8 per cent in May to July

People queue to enter a job centre in east London. AFP

UK unemployment rose slightly in the three months to July as pay growth caught up with price rises for the first time in more than a year, the Office for National Statistics said.

The rate of UK unemployment rose to 4.3 per cent, up from 4.2 per cent in the previous three months.

Statistics also showed that regular pay rose by 7.8 per cent in May to July, a record high, and the same pace as inflation over the period.

Total pay including bonuses jumped by 8.5 per cent, meaning that it exceeded inflation for the first time since March 2022, up 0.6 per cent with the Consumer Prices Index taken into account.

Darren Morgan, ONS director of economic statistics, said: “Earnings in cash terms continue to increase, at a record rate outside the pandemic-affected period.

“Coupled with lower inflation, this means people's real pay is no longer falling.

“Unemployment continues to increase in the latest three months. Correspondingly, employment is down, driven by falls among men and the self-employed.”

The proportion of people neither working nor looking for a job is “slightly up”, with an increase in students, as well as the long-term sick reaching yet another record, he added.

Chancellor Jeremy Hunt said: “It's heartening to see the number of employees on payroll is still close to record highs and that our unemployment rate remains below many of our international peers'.

“Wage growth remains high, partly reflecting one-off payments to public sector workers, but for real wages to grow sustainably we must stick to our plan to halve inflation.”

Prime Minister Rishi Sunak said at the start of 2023 that he hoped to halve UK annual inflation when the level stood above 10 per cent.

But it remains at 6.8 per cent, the highest among G7 nations.

“The tightness of the labour market continued to ease in July,” noted Ashley Webb, UK economist at Capital Economics research group.

“But the … wage growth will only add to the Bank of England's unease and supports our view that the bank will raise interest rates once more, from 5.25 per cent currently to a peak of 5.5 per cent” at its regular policy meeting next week.

However, money markets see a more-than 50 per cent chance of a further rise by the end of the year following the quarter-point hike to 5.5 per cent.

They then expect rates to remain on hold for much of 2024, a view recently endorsed by Bank of England's chief economist Huw Pill, who said he favoured a “Table Mountain” path for rates, where they remain elevated for some time.

However, a Bank of England policymaker recently warned keeping them at the current level could risk embedding high inflation into the economy.

Catherine Mann, who is a member of the bank’s nine-person monetary policy committee in charge of deciding interest rates, said she would rather “err on the side of over-tightening”.

“To pause or to hold the policy rate lower for longer risks inflation becoming more deeply embedded, which would then require more tightening in total, to both change inflation itself and to wring out the embedded inflation that comes from the sustained duration above target,” Ms Mann told the Canadian Association for Business Economics.

“But if I am wrong, and inflation decelerates more quickly and activity deteriorates more significantly, I will not hesitate to cut rates.”

The focus will now turn inflation data next week.

The Bank is forecasting a temporary increase to 7.1 per cent in August before price growth resumes its decline towards the 2 per cent target.