Starmer warns public sector pay rises will push up inflation

Problems with the minimum wage

There are also expected to be significant increases in the National Minimum Wage (NLW), which has risen by 9.8% this year under the Conservatives. This will affect more workers than just those paid the statutory minimum, as employers have to increase the wages of other workers to keep contributions above the NLW.

Rob Wood of Pantheon Macroeconomics said rapid rate hikes could put rate cuts at risk.

He added: “Further increases in the minimum wage would be even more important for the Bank of England.

“Labour (has indicated) will seek to raise the minimum wage to more than two-thirds of the average wage. The question is how quickly they do it. If you try to do it all in one year, it could delay the Bank of England’s rate cuts. If you spread that across the whole of Parliament, I don’t think it will have any real impact on the Bank’s interest rate decisions in the short term.”

At its June interest rate meeting, the Bank of England’s Monetary Policy Committee noted that “some recent data suggest risks that wage growth in the near term may be weaker than expected”.

“There is a risk that there has been a more lasting change in pricing and wage-setting behaviour,” said policymakers led by Andrew Bailey, the bank’s governor.

They will meet again next week, with economists and financial markets divided on whether interest rates should be cut from 5.25% to 5%.

A government spokesman said: “We value the important contribution that almost 6 million public sector workers make to our country. The pay review process is ongoing and no final decisions have been made. We will provide an update in due course; however, we have no illusions about the scale of the fiscal fallout we face.”

In a separate note Tuesday, EY’s ITEM Club said it expected an interest rate cut in September, not August, but noted that potential higher government spending could affect MPC decisions.

“The change of government is a major source of uncertainty for the forecast because of uncertainty over the government’s approach to fiscal policy,” the economists said.

“Stronger growth could be possible if the new government were to decide on a lower or slower pace of fiscal consolidation.”