BoE considers further rate hikes as strong demand for workers persists

BoE considers further rate hikes as strong demand for workers persists

According to a closely watched survey released today, inflation in the UK economy persists due to businesses passing on higher wage costs, despite signs of easing price pressures. The survey conducted by S&P Global and the Chartered Institute of Procurement and Supply (CIPS) reveals that reductions in energy and transport bills are being offset by elevated wage expenses.

The report suggests that the Bank of England may need to continue raising interest rates as the demand for workers in the services sector, including pubs, bars, and restaurants, remains strong. Services companies, driven by optimism about the short-lived economic slowdown, are adding to their workforce at a solid pace.

Although businesses are still raising prices, the overall rate of cost inflation has decreased to its lowest level since May 2021, resulting in slower price growth. However, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, warns that these reductions are not happening rapidly enough to prevent further increases in interest rates.

The survey reveals a slowdown in the growth of services activity, with the index dropping to 53.7 in June from 55.2 in May. The composite Purchasing Managers’ Index (PMI) for the entire UK private sector also declined to 52.8 from 54. Despite this, expectations of future growth are driving elevated wages as companies compete to attract talent through increased pay. However, concerns arise as wages have risen by over seven percent in the past year, the second-highest acceleration on record, while long-term pay growth remains stagnant in real terms.

The survey highlights that the UK’s inflation problem may be more resistant and driven by domestic factors. Services companies, faced with substantial wage costs, have been compelled to raise prices. Services inflation reached a historic high of over seven percent in May, raising concerns about the overall inflationary trend in the country.