Good news on UK wages has been eclipsed by the Iran war’s energy price impact, as the Bank of England voted unanimously to hold rates at 3.75% on Thursday while warning that rising global energy costs could push inflation above 3% and require rate hikes. Official data published the same day showed wage growth slowing sharply in the three months to January, a development that would normally have been welcomed as evidence of easing inflationary pressure. The war, however, has introduced a more powerful inflationary force that has overshadowed the positive domestic signal.
The slowdown in wage growth is an important part of the inflation picture. High wage growth had been a persistent concern for the Bank in previous years, as it fed through to service sector inflation and made it harder to achieve the 2% target. The most recent data suggested that pressure was easing, which should have created room for a rate reduction. The Iran war has prevented the Bank from capitalising on that improvement.
Governor Andrew Bailey acknowledged the positive wage data but said the energy price risk from the conflict was the dominant consideration for the committee at this point. He said the Bank was closely monitoring how the war’s energy market impact developed and retained the option to act through rate policy if the inflation outlook worsened. His message was that the good news on wages was not being ignored, but it was insufficient to offset the inflationary risk created by the conflict.
Markets paid little attention to the wage data, focusing instead on the energy price warnings. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders priced in rate hikes before year end. Analysts noted that the good news on wages might reassert itself as an important factor if the conflict de-escalates and energy prices stabilise.
For UK workers, the prospect of slowing wage growth combined with potentially higher energy costs and rising mortgage rates creates a challenging financial environment. Real wages — adjusted for inflation — could come under renewed pressure if the Bank is right about the energy price shock. The next few months of data will be critical in determining whether the good news on wages is enough to prevent a new cost-of-living squeeze.