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. Still, there were signs that firms’ struggle to find workers was beginning to ease, with the unemployment rate unexpectedly ticking up to 4% as more people look for jobs.
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 second piece is inflation data expected to be released next week.
While traders still expect the central bank to raise rates by another half point next month, they pared back bets on how much further rates will rise. Traders now see the possibility of rates peaking at 6.25%, after fully pricing in 6.5% last week. The pound, which jumped to a 15-month high after the initial release, later gave up gains as markets digested the signals of slack in the labor pool.
Why UK Inflation Is So High and Tough to Bring Down: QuickTake
“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.”
Other signs that the labor market may be starting to ease included a drop in inactivity. 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.
The effects of the BOE’s quickest tightening cycle in at least three decades are still trickling down through the economy. The average rate for two-year fixed-rate mortgages rose to 6.66% on Tuesday, the highest since August 2008, according to Moneyfacts Group Plc.
The bank’s Monetary Policy Committee is concerned that 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. 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 UK inflation, which at 8.7% in May was higher than any other Group of Seven nation. Bailey used his annual Mansion House speech on Monday to warn that wage pressures were too strong to rein in price growth.
“Both price and wage increases at current rates are not consistent with the inflation target,” Bailey said 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.
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.
“It’s early days yet, but the BOE will see this as a positive,” said Craig Inches, head of rates and cash at Royal London Asset Management. “It’s likely that the MPC will need to deliver more hikes, but the market reaction this morning calls it into question. Did the market have too much priced expecting rates to get to 6.5%?”
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.
“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 and Greg Ritchie.
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