In a recent analysis of the UK’s economic landscape, it’s evident that wage growth is propelling inflation. However, the story isn’t the same across all sectors.
Wage Surge: From May to July 2023, the annual growth rate of regular private sector pay soared to 8.1%. This surge in wages has been a driving force behind the country’s inflationary pressures.
Manufacturing and Services: Surprisingly, in manufacturing and some service industries, wage hikes between 2019 and June 2023 didn’t significantly impact labor costs. Instead, other factors have been the main drivers of rising industry output prices.
Services Feeling the Heat: Conversely, several service sectors have felt the full impact of wage increases. For them, these rising labor costs explain most of the surge in output prices since 2019.
Business-Level Analysis: A close look at large manufacturing businesses revealed an interesting trend. There’s no clear link between a company’s annual wage increases and the size of output price hikes within the same company. While a mild correlation was noted in Quarter 1 (Jan to Mar) 2023, it faded in Quarter 2 (Apr to June) 2023.
Inflationary Factors: The post-pandemic era has witnessed unprecedented inflation levels, driven by factors such as surging natural gas prices, global energy and commodity price spikes triggered by the Russia-Ukraine crisis, and supply chain disruptions.
Passing On Costs: To cope with rising input prices, businesses have adopted diverse strategies, including adjusting profit margins, increasing consumer prices, cutting input purchases, enhancing productivity, and changing inputs. The extent to which businesses pass on input cost increases varies by industry.
Labor Costs and Industry Response: Some sectors like law, accounting, and management consultancy have experienced substantial wage growth relative to turnover. However, in most manufacturing industries, labor costs are a smaller part of total output, limiting their influence on output prices.
Conclusion: While wage growth has undeniably fueled inflation, its impact is not uniform across industries. Understanding the intricate dynamics of wage-price relationships is crucial in managing inflationary pressures.