A surge in annual pay growth rates for the period from May to July 2023 reported by the Office for National Statistics (ONS) this week indicates a promising trajectory for the nation's labour market. But do these numbers tell the full economic story?

The increase in regular pay, excluding bonuses, was one of the headline findings from the latest statistics, with annual growth rate reaching 7.8%, making it the highest recorded figure since comparable records were initiated back in 2001. This rate is consistent with the preceding three-month period.

When considering employees' average total pay including bonuses, the annual growth rate was an equally substantial 8.5% during the same period. However, this figure is significantly influenced by one-off payments made in June and July 2023.

ICAEW’s Economies Director Suren Thiru says: “Although these figures suggest that pay growth is now higher than inflation, the strong headline outturn is largely driven by huge rises in a few sectors, including the public sector where one-off payments to NHS staff and civil servants boosted the figures.

“Labour market indicators such as wages tend to lag behind the wider economy, therefore the strength in salary settlements may merely reflect a reaction to earlier surges in inflation than current trends.”

Thiru adds that a rise in unemployment rates and jobs vacancies provides growing evidence that the UK jobs market is weakening, “which is likely to help moderate wage growth over the coming months.”

Moreover, in real terms—adjusted for inflation using the Consumer Prices Index including owner occupiers' housing costs (CPIH)—the data reveals an increase in total pay by 1.2% compared with the previous year. For regular pay, the annual growth rate was 0.6%, demonstrating continued positive trends.

In the public sector, the annual average regular pay growth rate surged to 6.6%, marking the highest recorded figure since the inception of comparable records in 2001. The private sector, on the other hand, reported an 8.1% growth rate, ranking as one of the largest annual growth rates observed outside of the pandemic period.

In terms of sector-specific data, the finance and business services sector led the way with an annual regular growth rate of 9.5%, indicating substantial progress. Following closely, the manufacturing sector posted an 8.1% growth rate—an achievement that ranks among the highest recorded annual growth rates for manufacturing since comparable records began in 2001.

Simon Gray, ICAEW Head of Business, says wage concerns are dominating the business agenda. “ICAEW members working in the manufacturing sector have cited the National Living Wage as having a knock-on effect within organisations as higher-paid workers look to protect pay differentials. Businesses have been creative in encouraging retention and recruitment through alternatives, including increased flexibility and free food, but the ONS figures are evidence that wage pressures remain,” he says.

Gray says the availability of talent and competition for staff remain the top business challenges post pandemic and significant barriers to growth. “Although in recent months this pressure has started to ease, for labour-intensive businesses, cost remains a challenge, particularly as we hear reports that the ability to pass on price increases has started to wane.”

However, Thiru says there are still good reasons to believe that inflation wages will fall back over the rest of the year as rising unemployment and tighter monetary policy help choke off demand in the economy.

“While interest rates will probably rise again this month, focusing too much on current inflation and wage data to set rates can lead to damaging policy mistakes given the long time lag between rate rises and their effect on the wider economy,” he says.