UK wages growth hits record high, add to BOE’s inflation concerns

UK economy

Wages in the UK rose at a record pace, fueling fears of a wage price spiral that will inevitably lead the Bank of England (BoE) to raise rates further. Just a day after BoE Gov. Andrew Bailey said inflation will start to fall measurably Average weekly wages, excluding bonuses, rose 7.3% as staff demanded more pay to keep pace with consumer price inflation, which has been running in double digits for much of the last year.

Meanwhile, the unemployment rate unexpectedly rose to 4% in June from 3.8% the prior month. Economists forecast the unemployment rate to remain at 3.8%.

Inflation

Food inflation is still weighing on shoppers' ability to spend on nonessential items. The British Retail Consortium (BRC) retail sales monitor rose by 4.2% year-on-year (YoY) on a like-for-like basis. It is higher than the 3.7% increase recorded in May but much lower than inflation. In other words, an increase in spending but a drop in the volume of goods purchased the survey shows that so far, consumers remain resilient.

Bank of England

Over the second quarter, food spending was up 9.8%. But the threat of further Bank of England (BOE) rate hikes and the prospect of a slower-than-expected economic recovery mean consumers remain cautious. Non-food spending only grew by 0.3% in the period. On Thursday, a shock could come with the monthly gross domestic product (GDP) data. The British economy is expected to have contracted by 0.4% in May month-over-month (MoM).

This would take the three-month average to -0.1%. We are nowhere near talking about a recession yet, but it is a scenario that economists keep in mind, as many see rates rising a further 150 basis points this year.

The Federal Reserve

The Federal Reserve (Fed) might still need to raise interest rates further, but the tightening cycle is coming to an end. Yesterday, several Fed officials expressed their views. For San Francisco Fed President Mary Daly, the Fed is nearing "the last part" of its hiking cycle. For Fed Vice Chair for Supervision Michael Barr, "I'll just say for myself, I think we're close." Of course, not all Fed members agree. Cleveland Fed President Loretta Mester told reporters yesterday that "if it was just me alone, I would have moved the rates up, but I understood the rationale for not moving in June."

Australia inflation

In Australia, consumer sentiment improved in July. The Westpac consumer sentiment index rose 2.7% in July to 81.3, the biggest gain since April. It reflects an improvement on the consumer inflation front and the fact that the Reserve Bank (RBA) held rates at 4.1% at its last meeting. However, the index remains well below 100, which means that pessimists still outnumber optimists for the 17th month running. Australian business conditions also improved. National Automotive Board (NAB) business confidence rose to 0 in June from -4 in May.

Major banks

Major banks are to undergo a major overhaul in the way they are assessed for their operational risks. If it goes through, it will be one of the biggest regulatory overhauls since the financial crisis.

The top US banking regulator, Michael Barr, says he wants the big banks to start using a standardised approach for estimating credit, operational, and trading risks rather than relying on their own estimates. The Fed's annual stress tests should be reassessed to better capture the dangers faced and to better align Wall Street with international standards known as Basel III.

It may set up a clash over the amount of capital required to cover increased risks, as the banks have long fought against higher capital requirements. The announcement comes just days before the largest banks begin posting their second-quarter results, starting on Friday with JPMorgan, Citigroup , and Wells Fargo.