UK wage growth accelerated unexpectedly, adding to inflationary pressures that are concerning the Bank of England.
(Bloomberg) — UK wage growth accelerated unexpectedly, adding to inflationary pressures that are concerning the Bank of England.
Average earnings excluding bonuses rose 6.6% in the three months through February compared with a year ago, the Office for National Statistics said Tuesday. That was quicker than the 6.2% pace economists had expected. The previous month’s reading was also revised up, dashing hopes for a slowdown.
Policy makers led by BOE Governor Andrew Bailey are expecting both pay growth and inflation to cool. A report due tomorrow on consumer prices will be crucial to determine whether the central bank can afford to let up on its most aggressive series of rate rises in four decades.
“A similar blowout in services inflation tomorrow would probably be enough to lock in another 25bp rate hike next month,” said James Smith at ING Developed Markets.
In the wake of the data, Goldman Sachs, which had expected the BOE to hold rates steady at 4.25% through next year, now expects a 25 basis-points hike in May. Bloomberg Economics also expects an increase to 4.5% next month, having previously predicted no change.
Investors are pricing in at least another 50 basis points of tightening by September after bolstering wagers following the pay shock. The two-year gilt yield was up 5 basis points at 3.66% as of 1 p.m. London time, while the pound advanced 0.6% to $1.2446.
The jobs data “do nothing to assuage concerns on the MPC about the threat of a wages/price spiral,” said Stuart Cole at Equiti Capital. That, he said, “should be enough to seal another hike in interest rates” next month “unless we get a surprisingly soft set of inflation numbers tomorrow.”
Crucially, a key wage metric watched by the BOE — annualized private-sector wage growth — is still above 5%, a level economists say is not consistent with bringing inflation back to the 2% target. The CPI result tomorrow is expected to show the first reading below double digits in seven months.
There were some signs that the red-hot labor market was loosening, which may ease pressure on wages in the months ahead. Unemployment rose unexpectedly to 3.8% from 3.7% as more people returned to the jobs market.
What Bloomberg Economics Says …
“The scale of the beat in the wage data will be very hard for the central bank to ignore. We now think the BOE will lift rates by 25 basis points in May, having previously expected a hold.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.
A 153,000 decline in working-age inactivity — the people who do not have a job and aren’t looking — was mainly driven by students getting back into work.
The huge rise in the number of inactive students during the pandemic has now largely reversed, but overall there are still 422,000 more inactive people than before Covid struck. Those inactive due to long-term sickness hit a record high.
“This is largely due to younger people being more confident about entering the labor market than they were during the pandemic,” said Kitty Ussher, chief economist at the Institute of Directors. But the labor market “remains tight,” Ussher added, with high vacancies, low unemployment and a low redundancy rate meaning it is still an employee’s market.
Despite the fall in inactivity, the number of people in work is still 123,000 fewer than before the pandemic. Every other Group of Seven nation has seen employment push on to record highs.
Yael Selfin, chief economist at KPMG, said higher working-from-home rates could be influencing the labor market figures.”
“While headline indicators could give an impression of a historically tight labor market, they may also reflect more widespread remote working – which could be keeping the structural rate of unemployment low,” she said. “The falling cost of digital advertising may be keeping the vacancy rate artificially high.”
Sam Tombs, however, said the “labor market is not nearly as hot as the employment figures imply.” The growth in unemployment was driven by a rise in self-employment, he said, while the number of full-time employees actually fell.
“On the face of it, the labor market still looks very tight, given that the unemployment rate remains well below the 4.25% judged by the Monetary Policy Committee to be its equilibrium rate,” Tombs said.
“But the proportion of inactive people that say they would like a job has increased to 20.2% in the three months to February — the highest proportion since June 2021 — from 19.2% in the three months to November,” he said.
Even so, there were plenty of figures in the jobs report to add to inflationary concerns.
The economy was still generating jobs at a healthy pace, fanning staff shortages that businesses say force them to push up pay. Employment in the latest period rose 169,000, more than triple the pace economists had expected.
Vacancies fell by 47,000 but remained historically high at 1.1 million. Jane Gratton, head of people policy at the British Chambers of Commerce, said vacancies were still too high for business’s comfort.
“These unfilled jobs are a drag anchor on firms, preventing them from fulfilling orders and taking on new work,” she said. “People shortages are also, inevitably, feeding into upward pressure on wage demands.”
The jump in pay also will concern Prime Minister Rishi Sunak, who has called for wage restraint to help meet his pledge to cut the rate of inflation in half by the end of the year.
“While unemployment remains close to historic lows, rising prices continue to eat into pay cheques which is why halving inflation this year is one of our top economic priorities,” said Chancellor of the Exchequer Jeremy Hunt.
Those pleas have failed to avert strikes by hundreds of thousands of workers from civil servants to nurses, who are demanding their pay keeps pace inflation.
There were 348,000 working days lost because of labor disputes in February, up from 210,000 the month before. Three-fifths of those days lost were in the education sector. More than 3 million days have been lost since June, the highest nine-month reading since 1990.
Pay in the public sector grew 5.3% from a year earlier, compared with 6.9% in the private sector. The gap between the two narrowed, with public sector pay rising at its fastest pace since 2005 — except for the period during the pandemic.
Adjusted for inflation, basic pay overall is falling at an annual rate of 2.3%.
–With assistance from Elina Ganatra, Eamon Akil Farhat, James Hirai and Aline Oyamada.
(Updates with rate call changes in fifth paragraph)
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