Bonus effect on earnings

By THIS IS MONEY
Updated:

 

We examine why the massive bonuses dished-out in the City are putting upward pressure on inflation.

What is it?

Average earnings, as measured by National Statistics, rose 4.6% in the year to February, up from 4.2% a month earlier. If bonuses are stripped out, the rise was 3.6%, unchanged on the previous month.

Does it matter?

Earnings are an important part of labour costs, a key element in inflation. If they rise by more than 4.5% the Bank of England gets worried and starts thinking about raising interest rates.

Who gets the big bonuses?

All eyes are on the Square Mile. There are only 300,000 City workers - less than 10% of the UK workforce - yet their bonuses are estimated at £8.8bn and have pushed up the rate of earnings growth across Britain by 28%.

So, blame the City if interest rates rise?

Up to a point. Those huge payouts have pushed central London house prices into the stratosphere. But the Bank is more worried about broadly based pay rises than bonuses for the few, which tail off anyway after the first two months of the year. If interest rates rise again, as seems likely, it is largely because inflation has already climbed to danger levels, with the retail prices index up 4.8% in a year, following sharp rises in heating and utility bills. City bonuses, and the upward push they give to average earnings, are the twist in the inflationary tail.

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