Surging pay creates a political dilemma

Given that inflation has been running at its highest level for decades, it is hardly surprising to see wages trying to keep pace. The latest figures from the Office for National Statistics (ONS) showed regular pay growth rose to 7.8 per cent in the three months to the end of June 2023 – the sharpest annual increase since 2001. Growth was 8.2 per cent in the private sector and 6.2 per cent in the public sector, with the finance and business services sector recording the highest rate at 9.4 per cent. 

Demands for more money to offset cost of living rises are at the root of the wage-push spiral that some economists think inevitably leads to higher inflation and a tough monetary response to smother it. To that end, the Bank of England will be under pressure to raise interest rates again for the 15th time in succession at the next meeting of the Monetary Policy Committee. 

Other economists, however, believe that there are exceptional causes for the latest wage surge and that the Bank should be cautious about further tightening. The ONS attributed the latest jump in total pay from 7.2 per cent in March to May to the pay settlement in the NHS. But even these increases are failing to keep pace with inflation, which will sustain further wage demands. 

Moreover, there are wider implications. The “triple lock” on the old age pension guarantees that it will increase either by 2.5 per cent, the inflation rate (currently 7.9 per cent) or the rise in average earnings, whichever is the greater. This might be one of the rare occasions in which earnings rather than prices are taken as the benchmark since the lock was introduced in 2010. The earnings growth figure used is the year-on-year increase for the period May to July, published in mid-September. 

The inflation figure used is the year-on-year increase up to September, published in mid-October. Amid hopes that prices will soon start to fall sharply, the link to earnings could prove costly to the Treasury and will mean a pension rise much higher than expected at the time of the Budget in March. The bill could be £2 billion greater than forecast, reopening the debate about whether to keep the triple lock. 

That is not a decision that will be taken this side of a general election. But with the soaring cost of welfare one of the biggest drags on economic growth – and more than two million people on long-term sickness payments – a future government must grasp the nettle of benefit reform.