Lidl pay boost underlines UK wage growth pressures

Lidl’s latest boost to hourly pay for its 24,500 UK employees underlines the big challenge facing the Bank of England: wage growth shows little sign of slowing and is a key part of why inflation is still high.

The discount supermarket said on Wednesday it would increase its basic rate of pay to £11.40 for staff outside London in September, and to £11.95 for those working in and around the capital, respectively 12.9 per cent and 13.7 per cent higher than a year earlier.

Its move will put pressure on other retailers to follow suit in a tight labour market where many employers are still struggling to fill vacancies, even as the economy remains weak. 

Wages are far from the biggest factor in the 19.1 per cent rise in UK food prices last year. Many retailers have cut bonus payments or found other ways to offset increases in hourly pay, and official data suggests total pay growth for the sector as a whole has been much lower.

But Stuart Machin, chief executive of retailer Marks and Spencer, said on Wednesday wages were one of the main drivers “still impacting inflation”.

“There are significant issues still,” he added. “Wages is one, and our suppliers still have significant headwinds like we do on wage costs.”

The retailer, which employs around 65,000 staff, has raised hourly pay by more than 20 per cent since the start of 2021. It is also accelerating a shift from manned tills to self-checkout to limit labour costs, which it estimates will rise by £100mn in this financial year. 

“Most people would be surprised by how much of their food bill is labour in stores and the supply chain — around 25 per cent,” Justin King, the former Sainsbury’s boss and a non-executive director at M&S, told the Financial Times last month.

Lidl’s announcement fits with other recent data showing wage growth remains stubbornly strong across the UK economy, even though labour shortages have eased to an extent as recent graduates and newly arrived immigrants bolster the workforce. 

Official data last week showed private sector wage growth was steady at 7 per cent in the three months to March, a blow to workers as living costs have risen much faster. The figure is far higher than the rate the BoE thinks is compatible with its 2 per cent inflation target.

More recent business surveys suggest there has been little change since March. Wage settlement data published on Wednesday by the research group XpertHR showed the median pay award remained at 6 per cent in the three months to April, when many pay settlements take effect. 

“While inflation is forecast to fall through the second half of this year, our research suggests pay awards may well hold at their current levels,” said Sheila Attwood, senior content manager at XpertHR. She noted that almost half of employers expected to make awards at the same level in 2024. 

The BoE has repeatedly warned that wage pressures could prolong the UK’s bout of high inflation, if workers seek higher pay to cope with rising living costs and companies prove able to raise prices to protect their margins, rather than absorbing the cost. 

Policymakers and economists believe this scenario is now playing out, and could force the central bank to raise interest rates above their current level of 4.5 per cent and keep them high for longer. 

The IMF warned on Tuesday that the UK could be stuck with persistently high inflation unless monetary policy remained tight. It urged the BoE to “focus on underlying measures of inflation, such as wage growth and services inflation”. 

Official data released on Wednesday showed services inflation, which is heavily influenced by labour costs, accelerated in April even though the headline rate of consumer price inflation had fallen to 8.7 per cent. 

Neil Shearing, chief economist at the consultancy Capital Economics, said the data made it clear “inflation is being driven increasingly by rapid wage growth”. He added that policymakers would need to “bear down on demand in order to cool the labour market”.