Wages have grown at their fastest rate in more than 20 years, but are still failing to keep up with inflation. Average pay rose by 6.4% between September and November compared with the same period in 2021, according to the Office for National Statistics (ONS) .It means that wages are growing at their fastest rate since records began in 2001. However, when adjusted for inflation, average pay fell in real terms by 2.6%. “Wages have risen at an unprecedented pace outside the pandemic period, piling pressure on the Bank of England to up interest rates again next month,” said Myron Jobson, senior personal finance analyst at interactive investor. “But the hottest inflation in almost four decades has prevented many workers from fully reaping the benefits of an income boost. After taking inflation into account, total pay (including bonuses) and regular pay both fell by 2.6% on the year as rising prices continued to strip buying power away from households.”This is one of the largest falls in real wages ever recorded. chancellor Jeremy Hunt said the figures showed that despite global economic challenges, “the UK labor market remains resilient with a record number of employees on payrolls.” He added that he was committed to halving inflation this year – currently running at 10.7% – which would helping people’s wages go further.In terms of public sector versus private sector pay, the gap has fallen slightly, but remains close to a record high.Average pay growth for the private sector was 7.2% in the three months to November, versus 3.3% in the public sector. This will likely fuel more pay demands from public sector employees, and more industrial action as workers go on strike. “A downturn is still very likely” Strong wage growth, plus a surprise 0.1% GDP rise in November, may sound like the economy has turned a corner and a recession is unlikely. However, Alice Haine, personal finance analyst at Bestinvest, believes “ the double hit of persistently high inflation and rising interest rates” will take their toll on households and businesses, meaning a downturn is “still very likely – albeit a shallower one that starts a little later than expected.” wave of redundancies. Faced with high inflation, many businesses have absorbed rising costs wherever possible, but there are signs that some are starting to let staff go, or are reducing their hours. Unemployment and redundancy numbers have edged up slightly, according to the ONS. “With so many economic headwinds, job insecurity will become more of an issue as 2023 progresses and households should brace their finances for all eventualities,” notes Haine. What does this mean for interest rates? Strong wage growth will add pressure on the Bank of England to raise rates at its next meeting, on 2 February. This would mark its 10th consecutive interest rate increase. The consultancy Capital Economics believes the Bank could hike rates from their current level of 3.5% to 4.5% in the coming months. But, combined with the economy proving to be more resilient than expected in November, these data will only increase the Bank of England’s fears that inflation, despite falling, is still persistent,” said Ashley Webb, UK economist at Capital Economics. Robert Thompson, chief economist at Kingswood, a wealth manager, thinks a 0.5 point hike – taking interest rates to 4% – is on the cards for February.