Background: A tight labor market is fueling inflationary pressures.
The United Kingdom is facing a persistent inflation problem as a result of a tight labor market, according to experts. Despite government efforts to address the issue, achieving the target of 2 percent inflation set by the central bank seems unlikely to happen anytime soon.
The surge in energy prices last year, similar to the situation in other European countries, contributed to the increase in inflation in Britain. However, the drop in wholesale prices this year has not been reflected in the household budgets due to the quarterly price caps set by a government regulator.
Apart from energy prices, there are other factors contributing to the inflationary pressures in Britain. Despite a high number of job vacancies, there are still more people out of the workforce compared to pre-pandemic levels. This situation, coupled with low unemployment rates, has led to employers raising wages to attract and retain workers.
While most wage increases are not keeping up with inflation, the rising labor costs pose a risk of further pushing up prices as companies pass on the added expenses to consumers.
In the private sector, pay rose by 7.1 percent in the three months leading up to May, which is a record high outside of the pandemic period when furlough programs distorted the data.
What’s Next: The central bank is still expected to raise rates.
Despite a lower-than-expected inflation reading, the Bank of England is anticipated to raise interest rates in early August. Economists at Barclays note that while certain data appears promising, there are indications of persisting inflation, particularly in services and private sector wage growth.
Barclays economists still expect a half-percent increase in rates next month, but acknowledge that the chances of a quarter-point increase have grown. The central bank has been consistently raising rates for the past 13 meetings, reaching 5 percent in the previous month from a low of 0.1 percent in late 2021.
Investors, however, have tempered their expectations regarding future rate increases. Previously, they predicted rates would peak above 6 percent, but now market trends suggest a climb to approximately 5.8 percent by the end of the year.
This change in rate expectations will come as good news to mortgage holders who are facing increases in their monthly payments. It will provide an opportunity for them to renew the terms on their fixed-rate loans, potentially saving them hundreds of pounds.