With the Chancellor’s Autumn Statement on the horizon, the UK economy continues to face challenges. Unemployment is rising (though so are wages), economic growth is sluggish and inflation has been slow to fall, which means interest rates aren’t expected to fall any time soon. This doesn’t give the Chancellor much room to increase spending or cut taxes next month.

And some of the current challenges could feed into more long-term problems: the prolonged period of high living costs means some households are taking on more debt, and high interest rates will make that debt more difficult to pay off. The Bank of England has warned that this could cause trouble for some households in the longer term.

Unemployment is rising but wage growth is still strong

Since the end of coronavirus lockdowns, the labour market has been tight: unemployment has been low and job vacancies have been high, making finding a job easier and recruitment more difficult.

More recently, however, the labour market has loosened. Though labour market data for June to August was less reliable than usual, it showed a continuation of recent trends: there was a rise in both unemployment and economic inactivity, and a fall in employment. The unemployment rate was 4.2% in June to August, up from 3.5% the year before. The Office for Budget Responsibility will publish fresh forecasts alongside the Autumn Statement on 22 November, but the latest forecasts from the Bank of England predicted an unemployment rate of 4.5% at the end of 2024 and 4.8% at the end of 2025.

Despite all this, wage growth is still strong. Office for National Statistics (ONS) data shows that nominal wages in Great Britain increased by 7.8% excluding bonuses and by 8.1% including bonuses in June to August 2023 compared with the previous year.

After adjusting for inflation, which was 7.2% in June to August, real wage growth was 0.6% excluding bonuses and 0.9% including bonuses. This is the first time real wages excluding bonuses grew since the end of 2021.

The high wage growth is partly due to public sector workers receiving bonuses over the summer, like the one NHS staff received in June. This comes after sharp falls in real public sector pay since 2021. Real annual public sector pay growth was 5.0% in June to August 2023, compared with 0.0% in the private sector. Real pay growth excluding bonuses was -0.3% in the public sector and 0.8% in the private sector, as shown in the chart below.

Including bonuses, real wage growth was 0.0% in the private sector and 5.0% in the public sector in June to August 2023. Excluding bonuses, real wage growth was 0.8% in the private sector and -0.3% in the public sector.
Source: ONS, EARN02: Average weekly earnings by sector, 17 October 2023.

High wage growth might also be related to remaining labour market tightness in specific sectors. For example, finance and business services still have high vacancy-to-unemployment ratios.

There is some disagreement about how important wage growth is for inflation going forward. The living-standards think tank the Resolution Foundation argued that wages “are key to where inflation goes next”. Conversely, in the Green Budget report from the Institute for Fiscal Studies, the financial services company Citigroup said current high wage growth is more likely to be a one off anomaly than an embedded trend.

The Bank of England is monitoring the situation and sees wages as a key indicator of inflation persistence, which will influence its decisions on future interest rates.

Inflation stayed over the same in September

Economists expected inflation to fall slightly in September 2023, but the Consumer Prices Index stayed at 6.7%, the same as in August. Higher motor fuel prices and hotel prices are part of the reason inflation didn’t fall, despite food inflation falling.

Core inflation (which excludes energy and food prices) fell slightly, from 6.2% in August to 6.1% in September. Services inflation rose from 6.8% to 6.9%.

As the chart below shows, inflation has mostly been higher in the UK than in similar economies since January 2023. Last month, the International Monetary Fund (IMF) forecast that the UK would have the highest inflation in the G7 next year.

In September 2023, the UK had a higher CPI inflation rate than (from highest to lowest
Figures based on the EU’s harmonised measure of inflation (HICP), in the UK this is the CPI.
Sources: ONS, series D7G7, Eurostat, HICP – all items, % change on year ago (retrieved 19 October 2023).

The variation between countries’ inflation rates might be partly due to differences in household energy bills. Energy bills in the UK have been slower to reflect the falls in wholesale gas prices than in other countries.

Next month’s UK inflation data will compare October 2023 prices with prices in October 2022, when energy prices were at their peak: the Energy Price Guarantee meant energy bills were an average of £2,500 a month from October 2022 and the current cap means an average of around £2,000. Since inflation data compares the most recent month with the same month in the previous year, inflation is expected to fall in October 2023.

Households will be feeling the effects of high interest rates for a while

Interest rates were left unchanged (at 5.25%) in September, but the Bank of England’s Monetary Policy Committee (MPC) signalled interest rates would stay high for a while. This affects households with mortgages and other debts, as well as having an impact on businesses, employment and economic growth.

In October, a member of the MPC pointed out that the full effect of high interest rates probably hasn’t hit households yet, saying “only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy.”

Around 4 million households have yet to face higher mortgage rates and will do so by the end of 2026. Some households are opting to take out longer mortgages to make payments more affordable, which might cause debt troubles in the future.

Households taking out loans or using credit cards as a response to the rising cost of living are particularly affected by high interest rates. Of the 54% of adults in Great Britain whose cost of living increased compared with a month ago at the end of September, 17% reported to the ONS using more credit than usual as a result.

Citizens Advice helped 124,077 people with debt in July to September 2023, and this number has been mostly increasing steadily since the cost of living began to rise at the end of 2021, as shown in the chart below.

Half the people Citizens Advice helped with debt in July to September 2023 were in a negative budget (their spending on essentials exceeded their income), which means they are likely to fall further into debt.

The number of people Citizens Advice help with debt each quarter has been mostly steadily increasing since Q1 2021, when it was just under 100,000.
Source: Citizens Advice Cost of living dashboard, debt data, slide 2 (accessed 19 October 2023).

About the author: Brigid Francis-Devine is a researcher at the House of Commons Library, specialising in incomes and the labour market.

Image: Iakov Kalinin on Adobe Stock.