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Concerns mount for the Bank of England as higher wages drive price rises
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A report has revealed higher wages are the "biggest driver of price rises" for the majority of businesses, which has increased fears at the Bank of England over inflation control.
The economic survey conducted by the British Chambers of Commerce (BCC) among its members from April to June indicated that the pace of wage increases had become the primary cost concern during this period, surpassing energy bills.
These findings align with the Bank of England's warnings about elevated wage settlements as it seeks to tackle the country's inflation issue.
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Following a surprising 0.5 percentage point increase in the bank rate last month, bringing it to five percent, Governor Andrew Bailey criticized higher corporate profit margins and salary hikes as the main contributors to persistent inflation.
While the most recent consumer prices index (CPI) remained steady at 8.7 percent, there was an unexpected surge in core inflation, which excludes volatile elements like food and energy.
Financial markets now predict the bank rate will peak above six percent due to the core inflation data and annual wage growth currently standing at 7.2 percent.
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While both the public and private sectors face pressure to attract and retain staff in a tight labor market and address the cost-of-living crisis, the bank argues that substantial pay packages are counterproductive.
Its mandate requires it to raise borrowing costs to bring inflation back down to its two percent target.
However, this process of dampening economic activity through interest rate hikes has resulted in higher fixed mortgage rates, exacerbating the strain on household budgets.
The BCC's survey findings suggest there may be further room for wage growth, as the official figures from the Office for National Statistics currently only cover up to April.
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A positive note in the BCC report was that a minority (45 percent) of the 5,000 participants anticipated price increases in the current third quarter, compared to 55 percent in the first three months of 2023.
BCC director general Shevaun Haviland said: "With inflationary pressures weakening, but wage cost concerns remaining high, our research should give the government and Bank of England pause for thought on their next steps.
"There is a fine balancing act to be struck here. Push too hard on interest rates and there is a real danger that the long-term outlook for economic growth and prosperity will be dented."
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The government has set a target to halve inflation this year, but the current level raises doubts about achieving this goal.
Tim Moore, economics director at S&P Global Market Intelligence, said: "The service sector showed renewed signs of fragility in June as rising interest rates and concerns about the UK economic outlook took their toll on customer demand."
However, he added: "Widespread increases in salary payments offset falling fuel bills and energy prices."
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