02 April 2024

National living wage rise could mean stickier inflation, economists warn

02 April 2024

The almost 10% rise in the UK minimum wage will be another obstacle for policy makers trying to get inflation to stay down at target levels but it could boost spending across the economy, according to some economists.

The potential inflationary impact of the pay hike to the UK’s lowest earners could also result in a longer wait before the Bank of England reduced interest rates, experts suggested.

It comes as the latest hike in the national living wage comes into force on Monday, which will increase the UK minimum wage for workers by 9.8% to £11.44 per hour.

The increase, which was announced by the Chancellor Jeremy Hunt last November, will help nearly three million low-paid workers across the UK.

It came amid a backdrop of rampant inflation, which had peaked at 11.1% before a slump over the past year, with higher interest rates helping to bring it back down to 3.4%.

Some economists have highlighted potential concerns that the significant wage increase could slow the predicted fall in inflation.

Ashley Webb, UK economist at consultancy Capital Economics said: “The fear is that the rise this year will contribute to stickier wage growth and inflation.”

However, others have suggested that the impact could be muted, with only around 4.9% of the UK workforce due to impacted by the increase.

Experts at Morgan Stanley argue that the rise is “not key” to the inflation outlook, particularly as the impact on overall pay growth is “largely key” instead.

The brokerage added: “While there are some nuances around existing premiums to the currently mandated national living wage in low-paid sectors, and whether these compress in a looser labour market, last year’s pay beats in spring came on the back of IT, finance and professional services sector pay – not any outsized surprises on low-paid sectors.”

Nevertheless, the impending rise will raise questions for Bank of England’s Monetary Policy Committee (MPC) as it assesses the inflation outlook and considers reducing interest rates from 5.25%.

The group of rate-setters have indicated they want to see firm signs that wage growth is cooling before cutting rates.

As a result, EY Item Club chief economic adviser Martin Beck said they may wish to assess the impact of the wage rise before major cuts to rates.

“Following accusations that policymakers were behind the curve in tightening policy when inflation was heading up, the MPC may well decide it’s appropriate to exercise further caution in bringing rates down,” he said.

“Assessing the effect of April’s large rise in the national living wage on broader pay growth offers another reason for inaction for the time being.”

However, companies including Next and Tesco have also indicated spending could be supported by the minimum wage rise.

Economists at PwC suggested the wage rise, alongside cuts to national insurance and slower overall inflation, could help retailers.

It said “retailers will be hoping that the spring brings green shoots after a challenging last 18 months” as a result.

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