Closing summary
Labour market data released by the ONS early this morning sparked concerns on two fronts: both about the about the pace of real wage erosion taking place as a result of surging inflation, as well as the tight jobs market which has made it harder for some businesses to to hire staff.
UK unemployment held steady at 3.8%, though regular pay on a real terms basis - excluding bonuses and accounting for the CPIH measure of inflation - dropped 2.8% in the three months to May in its fastest decline since records began in 2001.
Digging deeper though, there is a growing discrepancy between public and private sector pay, up 1.5% vs 7.2%, respectively.
Some are concerned that these figures are not reflected in debates surrounding pay demands by the likes of doctors, nurses, teachers and other public sector workers, whose earnings are being eroded by the surge in inflation.
It is unclear whether the latest data will influence interest rates, but analysts are still expecting another hike by the Bank of England at their next rate-setting meeting in August.
Here are the rest of today’s main stories:
Have a good rest of the day. We’ll be back tomorrow. KM
More on what the ONS labour market data and inflation will mean for the Bank of England’s interest rate decision next month.
The EY ITEM Club’s chief economic advisor Martin Beck believes market predictions that rates will hit 2.75% by the end of the year is overblown.
He instead is forecasting that rates will top out at 2% by December:
The prospect of inflation moving higher in the autumn means that the MPC is likely to continue raising interest rates at its next few meetings.
But market pricing implying that Bank Rate will reach 2.75% by end-2022 (150bps of hikes across four meetings) looks overstated given the data continue to offer little evidence to validate the MPC’s concerns about the risk of second round effects of inflation via higher wage growth.
The EY ITEM Club expects Bank Rate to finish the year at 2%.
US markets are open, with Nasdaq leading the pack up 1.3%, followed by the S&P 500 up 1% and the Dow up 0.7% at the start of trading.
US futures are pointing to a higher start for major indexes at 2:30pm BST:
- Dow futures are up 0.7%
- S&P futures are up 0.9%
- Nasdaq futures are up 0.9%
Unsurprisingly, one of the UK’s biggest business lobby groups, the Institute of Directors, is instead focusing on the impact of the tight labour market, as illustrated by today’s job figures, on companies’ ability to recruit staff.
Kitty Ussher, the IoD’s chief economist, said:
The labour market remains extremely tight, providing opportunities for households and no let up in the difficulties employers have in recruiting staff.
Having said that, there is a suggestion that things might be beginning to settle, with a slowing in the rate of increase in vacancies and the rate of unemployment possibly bottoming out in the most recent data.
Firms struggling to fill vacancies will also be encouraged by early signs that some of the people that had previously said they did not want a job are now entering the labour market, as shown by the economic inactivity rate falling by 0.4 percentage points on the previous quarter.
Ben Harrison, a director of the Work Foundation thinktank at Lancaster University says Tory leadership candidates need to have a clear plan for how to strengthen employment rights and ensure workers earn a sustainable wage, in light of today’s pay figures.
The harsh reality is it will be acutely worse for the 6 million people in the UK who are in severely insecure work, and already face low pay and uncertain hours.
Yet we haven’t heard anything from the Conservative leadership candidates that suggests they really recognise just how tough the squeeze is going to be for millions of workers.
The next Prime Minister must bring forward a clear plan for how they will support the most in need as the cost of living surges, and strengthen employment rights to ensure all workers are protected by decent terms and conditions.
Updated
Hotel Chocolat shares down 50%
Another UK stock taking a tumble today is Hotel Chocolat, which is down 50% after seeing its own profit prospects melt following an internal review of the business.
The chocolate retailer said on Tuesday that it was forecasting a pre-tax loss for full-year 2022, linked in part to the fact that it no longer expects to fully recover £23m worth of loans made to a Japanese joint venture between 2018 and 2022.
It is also putting aside £3m to deal with stores it had shuttered in the US, noting that it would cover lease costs, landlord deposits and inventory.
And given weaker economic forecasts, the company said it would now spend the next three years focusing on “its most proven and low risk strategies with the greatest potential for further increased profitability and scaled cash generation.”
That will include a focus on its VIP customer offering, its hot chocolate and chocolate cream alcohol products, while scaling back investment in the US and Japan.
Hotel Chocolat said it would likely mean weaker growth in the short to medium term:
The focus on profitable drivers will mean lower sales growth in the short term, and some transitional costs leading to lower profits in FY23.
Its chief executive and co-founder Angus Thirlwell added:
While we expect a temporary lower sales growth rate and profit margin for FY23 as we carry through our adjustments, the result will be a business delivering greater results, with less risk and an even stronger balance sheet with a higher profit percentage growth in FY24 and FY25.
UK stocks have mostly reversed losses suffered at the start of the session and are now trading higher.
The FTSE 100 is up around 0.33% at 7,245 points, while the more UK-focused FTSE 250 is up 0.4% at 19,092 points.
Some UK stocks have suffered significant losses today, though, including online furniture retailer Made.com, which is down around 38% in midday trading.
As my colleague Mark Sweney explains, Made.com has cut its revenue and profit forecasts and warned of job cuts as costs rise and customers reduce spending on “big ticket” purchases because of the cost of living crisis.
The online furniture retailer issued its third profit warning in less than a year on Tuesday, saying that recent trading has been “volatile” and that it now expects annual losses of £50m to £70m, up from a previous forecast of £15m to £30m made in May.
“It’s clear things are tough for consumers at the moment,” said Nicola Thompson, the chief executive at Made.com. “As such it’s prudent for us to take a conservative view of what we can expect in the second half of this year.”
Shares in Made.com, which have lost almost 90% of their value since the company floated at 200p last June, plunged 38% to 24p on Tuesday morning.
Read more here:
In a memo to staff today, Virgin Money CEO David Duffy explained the bank’s rationale for agreeing to the £1000 one-off pay bump for staff struggling with cost of living pressures:
The increase in the cost of living is on everyone’s minds, whether in political circles, in the media, or in the local supermarket.
It’s also been part of many conversations among the Leadership Team because we know that many colleagues are experiencing additional pressure on their finances.
This has been echoed in what you’ve told us in pulse surveys, in our colleague engagement sessions, and other forums including discussions with our trade union.
Duffy added the £1000 assistance was on top of an existing pay rise that took place earlier this year and gave staff an “average uplift of 5% in base salary.”
However, we’ve continued to monitor the situation closely and, driven by our purpose, concluded that now is the right time to make a special one-off payment. For all eligible colleagues, an additional £1,000 will be paid with your August pay on Friday 19 August.
It’s not a salary increase, but another UK bank - Virgin Money - has agreed to a one-off £1000 payment to staff to help with the cost of living crisis.
Unite the union has struck a deal with the bank, which bought Clydesdale and Yorkshire bank owners CYBG back in 2018, that will secure the payment for staff earning less than £50,000 per year.
That accounts for three out of every four Virgin Money employees, or around 78%. The payment will appear in their August pay packets.
BREAKING NEWS - Unite secures extra cost of living payment for three out of four Virgin Money UK staff
— UniteFinanceSector (@Unite_Finance) July 19, 2022
Unite has won an £1,000 additional payment to lower paid staff through the cost of living crisis.
Unite’s national officer Caren Evans said they will now push for a wage increase:
Unite has secured the £1,000 payment following a campaign to show Virgin Money UK how the increases to the cost of living is hitting the overwhelming majority of its staff.
“The union will now continue to campaign to secure a consolidated pay increase for the whole workforce to ensure that all wages increase in line with inflation.
In further bad news for working households, research from Kantar suggests grocery prices will continue to rise, putting additional pressure on finances.
More from our retail correspondent Sarah Butler:
Supermarket inflation is expected to reach the highest level since at least 2008 in August after rising to almost 10% this month.
Families are facing a £454 increase in average annual grocery bills, adding pressure to the cost of living crisis, as prices of butter, milk and pet food rise at the fastest rates.
Inflation of 9.9% in the four weeks to 10 July and soaring sales of ice-cream and sun lotion – up 14% and 66% respectively – underpinned the first rise in overall grocery sales since April last year.
The 0.1% rise was driven by Aldi and Lidl, both of which increased sales by more than 11%.
Fraser McKevitt, the head of retail and consumer insight at Kantar, said:
Grocery prices continue to soar to near record-breaking heights and have jumped by another 1.6 percentage points since last month.
This is the second-highest level of grocery inflation that we’ve seen since we started tracking prices in this way in 2008 and we’re likely to surpass the previous high come August.
All this means that people will be feeling the pinch during our first restriction-free summer since 2019.
Taking a barbecue as an example, buying burgers, halloumi and coleslaw for some alfresco dining would cost you 13%, 17% and 14% more than it would have this time last year.
Read more here:
A senior economist at the Institute for Fiscal Studies thinktank says today’s data illustrates the rise in pay inequality across the UK:
Latest ONS stats show pay inequality continuing to rise.
— Xiaowei Xu (@xiaoweixu_) July 19, 2022
Top 1% of earners have secured above-inflation pay rises: their real pay has increased by 1% since October 2021 (when furlough ended).
Bottom 10% have seen their real pay fall by 3%. pic.twitter.com/mewHSsnXHt
So how will today’s labour market figures influence interest rates?
Strategists at ING believe it’s unlikely to influence members of the rate-setting monetary policy committee at the Bank of England, noting that the ‘mixed bag’ data will give both doves and hawks ammunition ahead of the next rate decision due 4 August.
However, those same analysts expect the Bank will end up pushing through a 50 basis point hike next month:
The latest UK jobs data is unlikely to change too many minds within the Bank of England’s policy committee.
Those that have been pushing for 50bp rate hikes will remain concerned about worker shortages and the impact on wage growth, while the doves will focus on some fresh signs that the jobs market is no longer tightening.
Still, given that markets are fully pricing in a 50bp hike and that the MPC is concerned about recent sterling pressure, we narrowly think the BoE will implement a 50bp hike at its August meeting.
Updated
Forget talk of a return to the inflationary spirals of the 1970s. The real story of Britain’s labour market is of an intensifying squeeze on living standards as the gap between pay and the cost of living widens.
Real regular pay – wages adjusted for prices once bonus payments have been stripped out – were 2.8% lower in the three months to May than in the same period of 2021.
Not only was that the sixth monthly decline in a row, it was the biggest drop since modern records began in 2001.
What’s more, there is worse to come as inflation heads higher over the coming months.
Pay growth excluding bonuses picked up slightly from 4.2% to 4.3% according to the latest Office for National Statistics data but nowhere near fast enough to keep up with price increases. If the Bank of England is right and inflation peaks above 11% after energy bills rise again in the autumn the pressure on household budgets will be enormous.
Including bonuses the picture is a bit brighter. Here the fall in real pay is smaller – at 0.9% – but the benefits of bonuses have been skewed towards better paid workers in the finance and business services sectors and construction.
These groups enjoyed annual total pay growth of 8.2% and 8.1% respectively, enough to keep pace with price rises.
Read more here:
Updated
Economics editor Phillip Inman has the full story on today’s labour data:
British workers’ living standards dropped in May at a record rate after pay rises failed to keep pace with inflation.
Earnings growth increased across the private and public sector by 4.3% in the three months to May excluding bonuses, the Office for National Statistics said, but that left pay down by 2.8% – a record fall.
Labour blamed the Conservative government for the fall in real wages, saying it “left people more exposed to inflation and the cost of living crisis”.
Average pay growth including bonuses for the private sector was 7.2% in the three months from March to May, while for the public sector it was 1.5%, leaving an average of 6.2%.
Strong bonus payments in some sectors gave a boost to the figures, the ONS said, with the financial and professional services and construction sectors seeing pay growth of 8.2% and 8.1%, respectively.
There was better news from figures showing the number of people in employment jumped in May. More than 290,000 workers joined the labour market, about 120,000 more than forecast by City analysts. Meanwhile, unemployment remained steady at 3.8% and employers pushed up the level of vacancies to a fresh high.
But employers failed to attract many of the workers who quit the labour market during the pandemic to leave the employment rate of 75.9% below pre-pandemic levels.
And the cost of living crisis also worsened as pay failed to keep pace with rising prices, the Office for National Statistics said.
Read more here:
Updated
The Financial Times’ retail correspondent highlights how the debate around public sector pay and strikes seems to ignore the salary hikes so far enjoyed by private sector staff:
ONS labour market data out today. Private sector pay up 7.2% over past year vs public sector up 1.5%
— Jonathan Eley (@JonathanEley) July 19, 2022
But public sector unions are "greedy" and clapping for heroes feels a long, long time ago...
Growing divide between public and private sector pay
Despite employers like Santander UK attempting to combat the cost of living crisis for staff by raising salaries, there is a growing divide between public and private sector pay.
The BBC is reporting today that the government is due to reveal a pay deal for 2.5m public sector workers, including teachers, doctors, nurses, police officers and members of the army. However, any reward is unlikely to match CPI inflation, which hit 9.1% in May.
Analysts say the discrepancy between private and public sector salaries can be explained in part by low unemployment levels, which make it harder to recruit staff.
The resulting pay increases from private employers can run the risk of driving up costs for those unable to secure large enough pay deals, and is influencing strike action in certain sectors.
Laith Khalaf, head of investment analysis at AJ Bell, explains:
Growth in total pay, including bonuses, was 6.2% on average across the entire UK workforce. But there is a stark comparison between private sector wages, which rose by 7.2%, and public sector pay, which went up just 1.5%.
It seems the government is exercising pay restraint in the face of runaway inflation, but the private sector is not.
That’s hardly surprising given the obvious pressures on recruitment that companies are facing. Job vacancies stand at almost 1.3 million, slightly greater than the number of unemployed people.
That means if everyone seeking a job could be matched up with a vacancy, ignoring their location and skills, there would still be a shortfall.
Khalaf adds:
Against such a backdrop it’s no wonder businesses are willing to cough up more to get new staff and keep existing employees on the books.
The number of vacancies fell very slightly on the last reading, which means we may have just crested off the back of the peak and could start to see some normalisation of the labour market.
But the big concern is that the higher wages paid by the private sector will serve to entrench inflation, while the small pay rises witnessed in the public sector in the face of soaring prices will continue to stoke industrial tensions.
Updated
In what is likely to feel like fortuitous timing, lender Santander UK has become the latest employer to hike pay for staff amid the cost of living squeeze.
The bank said this morning that it would give 11,00 employees a 4% pay increase from the start of August to “help with the increased cost of living.”
The move will be aimed at all staff earning less than £35,000, which covers around 60% of the bank’s workforce, including the majority of its branch and call centre staff who deal with customers.
It said it will also increase its entry-level salaries to £19,500 from 1 August.
Santander UK chief executive Mike Regnier said:
The increased cost of living is impacting households across the country, so we have looked at how best we can help the majority of our own people who play such important roles for Santander.
This 4% pay raise will make a real difference to the majority of our customer facing and contact centre staff who are committed to helping our customers and businesses prosper in the current economic climate.
LibDem politicians are zeroing in on today’s pay figures, and are saying the Tory government has failed to take action in light of soaring inflation.
The Liberal Democrat treasury spokesperson Sarah Olney said:
People are seeing their paycheques eroded by soaring inflation month after month, yet they’ve been left with a zombie government that’s missing in action.
This must be a wake-up call to reverse this Conservative government’s unfair tax rises that are hammering families at the worst possible time.
Households need real help with their bills right now, not empty promises from would-be Conservative leaders and photo ops from an absentee prime minister.
After an initial drop, the pound has risen on the back of the jobs data and is now trading 0.2% higher against the US dollar to around $1.19.
But as the ONS head of labour market and household statistics David Freeman put it, today’s data offers a “mixed picture” for the UK labour market:
Commenting on today’s labour market data, ONS head of labour market and household statistics David Freeman said: (1/4)
— Office for National Statistics (ONS) (@ONS) July 19, 2022
⬇️ pic.twitter.com/gh5i6HqDco
Continuing, he said: (2/4)
— Office for National Statistics (ONS) (@ONS) July 19, 2022
⬇️ pic.twitter.com/6UktABCmSz
David Freeman added: (3/4)
— Office for National Statistics (ONS) (@ONS) July 19, 2022
⬇️ pic.twitter.com/GnKjs3ZXOX
He concluded: (4/4)
— Office for National Statistics (ONS) (@ONS) July 19, 2022
⬇ pic.twitter.com/E8OpFLJ0ur
The new chancellor Nadhim Zahawi has reacted to both the employment figures and hit to pay, but has tried trying to focus on apparent strength of the UK jobs market:
Today’s figures underline how strong our jobs market continues to be, providing encouragement in uncertain economic times – as we know being in work is one of the best ways for people to get on and support their families.
I am acutely aware that rising prices are affecting how far people’s hard-earned income goes, so we are providing help for households through cash grants and tax cuts.
We’re working alongside the Bank of England to bear down on inflation, providing support worth £37bn this financial year for the cost of living, and investing in skills to help people get into work and progress.
UK unemployment holds at 3.8% in three months to May
The ONS figures on real terms pay were included in jobs data released this morning, which showed that Britain’s unemployment rate held steady at 3.8% over the three months to May.
Headline indicators for the UK labour market for March to May 2022 show that
— Office for National Statistics (ONS) (@ONS) July 19, 2022
▪️ employment was 75.9%
▪️ unemployment was 3.8%
▪️ economic inactivity was 21.1%
➡️ https://t.co/BMT0KngDT4 pic.twitter.com/nTOZBxhHW0
Meanwhile, the number of people in work rose to the highest level since last summer, with another 296,000 people entering the jobs market. That was the largest increase since the three months to August 2021.
It suggests that its impact on pay, inflation and the subsequent cost of living crisis has not yet impacted employers’ decisions to hire and retain staff.
Introduction: UK workers suffer record drop in real terms pay
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
We start today with some tough news for UK workers, who are already sweltering in this week’s heatwave: regular pay is on the decline, having dropped 2.8% between March and May, marking its fastest rate since records began in 2001.
The Office for National Statistics delivered the figures this morning, which excludes bonuses and accounts for the CPIH measure of inflation that includes housing costs. It suggests workers are feeling further pain as rising prices take a bite out of their spending power.
After taking inflation into account, average pay including bonuses fell by 0.9% in the year to March to May 2022.
— Office for National Statistics (ONS) (@ONS) July 19, 2022
Excluding bonuses, it fell by 2.8% - the biggest fall since records began in 2001 https://t.co/jdOBu3PNFB pic.twitter.com/yp7erKE7li
We’ll take you through this data, reaction to it, and more in today’s business live blog. Stay tuned.
The agenda
- 10am BST: Eurozone CPI (final) for June
- 1:30pm BST: US housing starts for June
- US earnings: Netflix Q2
Updated
