The ratcheting effect of minimum wage may trigger a fresh round of pay increases.
From April, the minimum wage will rise by nearly a pound to £11.44 an hour for anyone aged over 21. A similar rise the year before means the minimum wage will have risen by just over 20pc in only two years.
Neil Carberry, head of the Recruitment and Employment Confederation, says: “For supermarkets who traditionally have not paid the national minimum wage, they paid 50p, £1, £1.50 above that, they’re feeling pressure to move things up.”
Companies must adjust the pay of all workers when minimum wage increases.
Carberry says: “If you’re a small hospitality firm and you pay your bar manager £1 or £1.50 more per hour than your bar staff, then clearly if your bar staff get a 10pc rise there is pressure to deliver a similar increase and the differential above it.”
Upward pressure on pay is stretching many businesses. This, he says, is “a real challenge”.
As a result, many companies with lower-paid staff are having to find ways to recoup profits elsewhere, either by increasing prices – another inflation driver – or reducing opening hours. In areas like logistics, Carberry says companies have started investing far more in automation to cope but for many service providers this is not an option.
All this means pressure to increase pay is impacting not just wage growth but also inflation across the services sector more broadly, two key metrics Bank of England rate-setters are concerned about.
This spells trouble for the Bank of England, where policymakers are adamant they need to see salaries normalising before they can start to bring down interest rates from their 16-year-high of 5.25pc.
Traders are betting that the Bank will deliver the first cut to borrowing costs in June, but Dales warns this may prove optimistic.