(Bloomberg) -- UK wages are rising at close to a record pace, maintaining pressure on the Bank of England to keep hiking interest rates despite a worsening economic outlook.

Official figures Tuesday show average earnings excluding bonuses were 6.1% higher in the three months through October than a year earlier. That’s the most since records began in 2001, barring the height of the coronavirus pandemic. 

The jump reflects labor shortages that remain chronic despite a cost-of-living crisis that is set to tip the UK into long recession, if it has not already done so. Those shortages are being made worse by the loss of hundreds of thousands of workers over the last two years. 

“These figures show the tightness in the UK labor market is not shifting significantly,” said Jane Gratton, Head of People Policy at the British Chambers of Commerce.

The finance and the business services sectors had the largest increase in wages, up 7%, followed by wholesale, retail and hospitality. 

The figures also showed a wide gap between the pay increases private-sector workers earn and what’s going to those in public services. Average regular pay growth for the private sector was 6.9% in the quarter through October, and 2.7% for the public sector.

What Bloomberg Economics Says ...

“The latest batch of jobs data lifts the odds of another 75-basis point hike at the Bank of England’s meeting this week, though it’s probably not enough to tip the balance. Strong wage growth will embolden the hawks calling for a bigger rise, while those preferring a smaller move will focus on signs that labor demand is cooling.”

—Ana Andrade, Bloomberg Economics. Click for the REACT.

The historic difference is likely to fuel the demands of government workers from nurses to immigration staff who are going on strike this month in pursuit of wage increases to match inflation, which hit a 41-year high of 11.1% in October. 

The ONS said that 417,000 working days were lost due to labor disputes in October 2022, which is the highest since November 2011.

Wages are still rising more slowly than inflation, reducing the spending power of UK workers and fueling the calls from unions for bigger wage increases. In real terms, pay fell 2.7%. 

The government has offered public-sector workers a 5% raise on average, insisting pay restraint is needed to repair the public finances and bear down on inflation. 

“Any action that risks embedding high prices into our economy will only prolong the pain for everyone, and stunt any prospect of long-term economic growth,” Chancellor of the Exchequer Jeremy Hunt said in a statement on Tuesday. 

The BOE has raised interest rates eight times over the last 12 months in an effort to avert a wage-price spiral. Investors expect a further half-point increase on Thursday, taking the benchmark rate to a 14-year high of 3.5%.

However, the decision is expected to be marked by deep divisions among policy makers over how quickly to tighten policy, given the dire state of the economy. 

There were some signs of loosening in the UK’s tight labor market. Inactivity, which measures people who are neither working nor want to work, fell by 76,000. As a result, employment and unemployment levels rose. 

“The labour market has now turned,” said Kitty Ussher, chief economist at the Institute of Directors. “While unemployment is still, thankfully, very low by historical standards, it has started to march upwards.”

The drop in inactivity was most pronounced among those aged 50 to 64, suggesting some of the early retirees may be returning the workforce in the face of rising living costs. Vacancies all fell for a sixth month running, as companies slowed their hiring plans once again.

“The sixth consecutive drop in vacancies signals that the labor market is no longer tightening,” said Yael Selfin, chief economist at KPMG UK. “Economic headwinds see the labor market at a turning point.”

The BOE expects unemployment to climb above 6% over the next three years, but given the challenges faced by companies in hiring in recent months, businesses may choose to freeze headcount rather than make redundancies even as the recession and rising costs thin profit margins.

--With assistance from Ben Sills.

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