Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

WAGES rising faster than inflation should be a positive development for the UK economy. That’s just as well. According to ONS data out this morning, average regular pay excluding bonuses increased at a 6.0% annual rate in the three months to August, about twice as fast as consumer prices.

The rate of growth in pay has moderated somewhat since reaching a record high of 7.3% in June, but remains higher than in any other year this century1.

Recent wage increases will come as a relief to workers across a number of sectors following a painful period of virtual pay stagnation stretching back to the global financial crisis. It’s taken a steep post-pandemic recovery to do it, but now deficits in HGV drivers, construction workers and care home staff appear to be reshaping parts of the employment landscape.

For the economy as a whole, the outlook may be more mixed. Modest pay deals in the public sector and the return of low-paid workers who left the labour market during the pandemic could act to keep a cap on average pay.

Businesses may also discover new ways to keep pay settlements in check, for example, by accelerating their plans to automate. Transport companies might decide to expand their van fleets to circumvent the exodus of both British and EU national HGV drivers.

The Bank of England estimates that underlying annual pay growth is likely to be considerably weaker than the headline data suggests, but still expects underlying wages to strengthen over the course of 2021 as the labour market recovers2.

Wage pressures have particular implications for investors in labour intensive industries, some of which – for example, food producers and clothing manufacturers – may already be suffering from squeezed profit margins as a result of higher raw material costs.

However, in many cases, such considerations deserve to be balanced against the increased buying power of customers, including in discretionary retail; or the improved credit quality of customers – important to banks and other retail lenders.

For lower paid workers especially, any increase in wages may soon be swallowed up by rising utility, food and fuel bills. However, significant wage increases in some sectors, a UK savings rate close to record levels and the wealth effect stemming from the property boom suggests the outlook for private consumption is healthy.

As ever, macroeconomic developments will affect the profitability of businesses and not in equal measure across all sectors. As the upwards pressure on wages continues, companies with pricing power will deserve to command a premium.

The Fidelity UK Select Fund emphasises “quality growth” businesses that have strong brands and robust balance sheets. Diageo, which has pricing power owing to its premium drinks brands; Next, benefiting from the demise of high street competitors; and NatWest Group are among the fund’s largest investments currently.

The Fidelity UK Select Fund features on Fidelity’s Select 50 list and is among Tom Stevenson’s five fund picks for 2021.


1 ONS, 12.10.21
2 Bank of England, 31.08.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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