Rising UK Wages Push up Prices in Services But Not Manufacturing

Rising wages in the manufacturing industry have not led to a clear increase in output prices, according to the Office for National Statistics.

(Bloomberg) — Rising wages in the manufacturing industry have not led to a clear increase in output prices, according to the Office for National Statistics.

But this is not the case in vast swathes of the services industry, where increased pay has caused prices to soar, the ONS said in a report on Friday.

The research comes as policymakers at the Bank of England ponder concerns that inflation, initially caused by the pandemic and then the war in Ukraine, is now becoming embedded through “second-round effects” — where workers bid up wages to protect their living standards and employers respond by raising prices to protect their margins.

“In manufacturing and some services industries, even after large wage increases between 2019 and June 2023, we find that labor costs have largely been stable as a fraction of output, and industry output price growth has appeared to be mainly caused by other factors,” the ONS said.

But it added that in “several services industries, labor costs are important and pass-through of wage rises could explain most output price growth since 2019.”

This is likely to worry the BOE as it weighs a 15th consecutive interest rate hike next week. While some policymakers are hinting that a pause may be on the way, concerned that much more tightening will cause an unnecessary recession, others are worried that inflation is not yet under control. 

Read more: BOE Turning Gloomier on UK Outlook Brings Rate Pause Into View

Asked in February 2023 about how much of the increase in input costs they had passed on to customers over the last six months, less than 15% of businesses said they had passed on the majority of input price increases — 23% said they had absorbed it all.

This varied by industry, the ONS said — wholesale and retail businesses were much less likely to say they had absorbed all input price rises.


In manufacturing, little of the rise in output costs between 2019 and May 2023 was attributable to rising wages. Even in the manufacturing of bakery products, the ONS said, which has seen relatively high wage growth, wages would be responsible for around a fifth of the total increase in output prices if they were fully passed through.

But these figures tended to be much higher in the services sector. In legal activities, 82% of output price increases were attributable to rising wages. In accounting, that rose to 133%, which meant higher wages should have theoretically led to even higher output price increases. 

The ONS noted, however, that these sectors have seen relatively low price increases. But the proportion of higher output costs attributable to higher wages was even larger in industries which have seen very strong wage growth, such as computer programming and consultancy, and market research.

They hit 127% and 271% respectively, and the ONS said it was “likely that higher wages are being offset by lower profits, and lower amounts spent on other inputs, as part of business adaption.”

Read more: UK Labor Market Weakens With Highest Unemployment Since 2021

–With assistance from Eamon Akil Farhat.

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