One million vacancies and soaring wages fuel UK inflation fears

The strong recovery in the labor market was highlighted in data published Tuesday by the Office for National Statistics and it could further fuel inflationary pressures in the UK economy. That could prompt the central bank to hike interest rates as early as May 2022, according to some economists.

There were a record 953,000 vacancies in the United Kingdom on average over the three months to July — 168,000 more than the first quarter of 2020 before coronavirus restrictions were introduced.

For July alone, vacancies may have exceeded one million for the first time based on early survey figures, according to Jonathan Athow, ONS deputy national statistician for economic statistics.

Vacancies in all industries increased, with arts, entertainment and recreation posting the fastest rate of growth following the lifting of all remaining social distancing restrictions in England on July 19.

"The world of work continues to rebound robustly from the effects of the pandemic," Athow said in a statement.

The unemployment rate fell 0.2 percentage points to 4.7%, according to the ONS. Athow said that there were no signs of redundancies starting to pick up ahead of the end of the government's furlough program, which supports wages, at the end of next month.

Growth in average total pay excluding bonuses was 7.4% in the three months to June compared with the same period in 2020. Even after stripping out factors such as the fall in the number of lower-paid jobs, the ONS data suggest that annual wage inflation was running between 3.5% and 4.9% in June, according to Berenberg senior economist Kallum Pickering.

"It remains well above the mere 2% average rate from 2009-2019," Pickering wrote in a research note. "With unemployment falling from an already low level and labor demand surging to well past previous record highs, the risks to the wage growth outlook look skewed to the upside," he added.

Rising wage pressures come as businesses are already contending with higher costs in their supply chains from raw materials shortages and soaring shipping rates.

"Together, these factors point to further inflation pressures ahead as firms try to pass on cost rises to consumers," Pickering said.

The Bank of England said earlier this month that it expects inflation to rise even further above its 2% target in the coming months and that it will set interest rates to ensure inflation returns to that level.

"We continue to look for the first rate hike in August 2022. But the strengthening inflation dynamic and strong recovery in domestic demand suggest the risks are tilted towards a hike even sooner that — perhaps as early as May 2022," Pickering added.

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