UK Wages Grow Faster Than Expected, Heaping Pressure on BOE

UK wages rose more than expected to a level that Bank of England Governor Andrew Bailey said is fueling inflation, maintaining pressure for higher interest rates.

(Bloomberg) — UK wages rose more than expected to a level that Bank of England Governor Andrew Bailey said is fueling inflation, maintaining pressure for higher interest rates.

Average weekly earnings excluding bonuses held at 7.3% in the three months through May after figures for the period through April were revised up, the Office for National Statistics said Tuesday. It equaled the highest readings on record last month and in mid-2021, when the figures were distorted by the pandemic. Economists had expected a slowdown to 7.1%.

“Today’s data confirm that the labor market is still too hot, as pay growth remains uncomfortably high,” said Yael Selfin, Chief Economist at KPMG UK. 

The figures are the first of two pieces of crucial data that will shape the Bank of England’s next decision on interest rates due on Aug. 3. 

The pound jumped after the release. It rose as much as 0.3% to $1.2899, the highest since April 2022. The currency is the best performing across the Group of 10 this year, bolstered by interest rates that tower over peers. 

Why UK Inflation Is So High and Tough to Bring Down: QuickTake

The yield on 10-year UK government bonds fell 2 basis points to 4.62%, in line with US Treasuries. Global bond markets rallied Tuesday as a selloff that drove yields to multi-year highs appeared to be abating.

Money-market pricing shows traders expect the BOE will raise rates by another 150 basis points by March, which would take the base rate to 6.5%. That compares with around 4% for the European Central Bank and around 5.5% for the Federal Reserve.

“Our jobs market is strong with unemployment low by historical standards,” Chancellor of the Exchequer Jeremy Hunt said. “But we still have around 1 million job vacancies, pushing up inflation even further. Our labor market reforms — including expanding free childcare next year — will help to build the high wage, high growth, low inflation economy we all want to see.”

The report also showed strong employment growth but an unexpected tick up in the unemployment rate to 4% as more people looked for jobs — a sign that tightness in the labor market may be starting to ease. The number of people in work jumped 102,000 in the latest quarter, stronger than the 85,000 that economists had expected.

“The labor market is turning,” Jamie Rush, the chief European economist for Bloomberg Economics, said on Bloomberg TV. “We just need to see some confirmation in the inflation data so the bank can rule out a 50 basis point hike.” 

What Bloomberg Economics Says …

“Another hot wage growth print increases the chances for the Bank of England repeating June’s shock 50-basis point rate rise with the same again in August. Next week’s CPI data release will provide the final say on the matter. A further uptick in core inflation would make it very difficult for the central bank to slow the pace of tightening.”

—Ana Andrade, Bloomberg Economics. Click for the REACT.

Policy makers led by Bailey are concerned inflation remains more than four times higher than their 2% target, with workers demanding higher pay to compensate for a squeeze on their living standards coming from soaring prices. Inflation data is due on July 19.

Pay excluding bonuses in the private sector picked up to 7.7%, the biggest growth outside of the pandemic. Public-sector pay climbed at the fastest pace since 2001.

Tightness in the labor market is one of the main factors fueling inflation in the UK, which at 8.7% in May was higher than any other Group of Seven nation. Bailey used his Mansion House speech on Monday to warn that wage pressures are currently too strong to rein in price growth in the UK.

“Both price and wage increases at current rates are not consistent with the inflation target,” said Bailey last night. “The interaction of above-target headline inflation with labor market tightness and demand pressure in the economy has made underlying developments in goods and services price inflation more sticky than previously expected.”

More than 600,000 people dropped out of the British workforce in the pandemic, forcing companies to offer higher pay to attract the staff they need. Bailey has said employers are also hoarding workers after facing recruitment difficulties, keeping unemployment extremely low.

This month’s report showed the portion of people classed as economically inactive — not in work or looking for a job — fell 0.4 percentage points compared to the previous quarter to 20.8%. It’s now 0.6 points higher than pre-pandemic levels.

Most age groups contributed to the drop, with the primary decline seen in people who had retired, those who were looking after family and for other reasons such as not yet starting a job hunt.

The ONS said that long-term sickness — a problem that has plagued the UK jobs market — decreased slightly on the quarter. 

Much of the increase in inactivity since the start of the pandemic has now been unwound. There were 280,916 more people not seeking work than before Covid in the three months to May, down from a peak of 641,710 last year and the lowest since May 2020 during the first lockdown.

“The ability to retire before receiving the state pension has been removed for many because of the soaring cost of living as the rising prices for energy bills, food and other essentials put household budgets under strain,” said Stephen Lowe of retirement specialist Just Group.

The BOE was forced to step up the pace of its interest rate rises last month after much stronger than expected labor market and inflation data. Investors have almost fully priced in a half-point hike in the BOE’s key rate to 5.5% in August and a peak rate of 6.5% early next year — the highest in more than two decades.

“Today’s figures will do nothing to convince (the BOE) that the labor market is no longer running hot, leaving it to conclude that monetary policy needs to be tightened further,” said Stuart Cole, chief macro economist at Equiti Capital in London. “It is hard not to conclude that significant work remains to be done if inflation is to be brought back under control.”

–With assistance from Constantine Courcoulas, Brendan Scott, Jill Namatsi, Greg Ritchie and Aline Oyamada.

(Updates market reaction.)

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