Strong labour market figures, which saw the unemployment rate fall below pre-pandemic levels, risk pushing up inflation further.
Figures from the Office for National Statistics showed that the unemployment rate dropped by a further 0.2% to 3.9% in the three months to January, despite the UK battling the Omicron wave.
At the same time, job vacancies hit a record high of 1,318,000 between December and February, up 105,000 on the last quarter.
Average earnings in the three months to January also rose to 4.8% higher than a year earlier, but pay is still struggling to keep pace with inflation. This could lead to employers seeking to push wages higher, creating a “vicious cycle” of wage growth and inflation.
Danni Hewson, financial analyst at AJ Bell, said: “It doesn’t matter that a record number of people are now on UK payrolls or that there is still a record number of job vacancies, people in work are feeling the pinch and it’s going to get worse. It’s not because wages aren’t rising, how could they not in such a tight labour market, it’s just that the cost of simply living is getting more and more expensive.
“If inflation was hovering around the Bank of England’s 2% target, then 3.8% wage growth would be considered a pretty decent number but with prices creeping up just about everywhere it will feel to workers like their pay has taken something of a haircut.”
Hewson says the dynamics are likely to worsen, with the imminent hike in National Insurance, a freeze in the tax threshold and rising energy prices all set to have an impact.
Derrick Dunne, CEO of YOU Asset Management, commented: “While the numbers may be broadly heading in the right direction, they are creating conditions for an inflation perfect storm. The labour shortage is in danger of becoming a bigger issue that feeds further inflation.
“Record high vacancies are a big dilemma for the Bank of England and another cloud in the broader cost-of-living crisis. Wage growth still lags inflation and people are moving jobs at record levels in search of better pay packets as a result.
“Such a tight labour market and pressure from workers will keep pushing employers to increase salaries. The BoE will be very conscious that this may have the effect of entrenching inflation more deeply into the economic landscape, by ensuring a vicious cycle of more wage growth and inflation.
“It’s a many-sided challenge that the Bank’s Monetary Policy Committee will be keen to tackle sooner rather than later, and today’s employment data will be front of mind when they meet this week to vote on interest rates.”
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