U.K. Firms Expect Pay Rises in Record Numbers on Inflation

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A record number of U.K. companies expect to increase wages as the war in Ukraine deepens the cost of living crisis, a survey showed.

The Lloyds Bank Business Barometer found that a half intended to boost average pay by at least 2% in the next 12 months. A fifth of businesses that have annual turnover of more than 100 million pounds ($131 million) predicted they'll increase pay by more than 5%. 

In response, more than half of 1,200 U.K. firms polled said they're likely to lift prices.

The report will fan Bank of England concerns about the so-called second-round effects on inflation. That's where higher prices fuel demands for higher pay, which then force firms to increase prices even more to protect profit margins. Governor Andrew Bailey controversially called on employees to exercise restraint in wage bargaining to prevent a wage-price spiral.

Read more: Europe's Workers Wary of Asking for Pay Raises Despite Inflation

The report also showed that hiring demand remains strong, with almost half of firms expecting to take on staff in the next 12 months as the economy recovers from the coronavirus pandemic. That underscores the tightness of the labor market, which is exacerbating inflationary pressures.

Geopolitical and economic uncertainty dragged down business confidence in March, by the most since the first two months of the pandemic, according to the survey, which was carried out in the first two weeks of March. Manufacturing and retail firms were hit hardest, though across sectors confidence remained above the long-term average.

“March's data show U.K. businesses are facing significant challenges from the impact of Russia's invasion of Ukraine in increasing economic uncertainty and ongoing inflationary pressures,” said Hann-Ju Ho, senior economist at Lloyds. “Following encouraging improvements at the start of the year, March's fall in confidence is therefore disappointing, but not surprising.”

(A previous version of this story corrected the proportion of firms expecting to raise pay by at least 2%)

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