UK Wage Growth Surges, Easing Inflationary Pressure but Signals of Labor Market Slowdown

(CTN News) – According to official data, a key measure of UK wages has surged, recording one of the joint fastest paces on record. However, alongside this strong wage growth, there are signs of cooling inflationary pressure in the labor market, offering potential relief for the Bank of England (BoE).

The surge in basic earnings, which rose 7.3% in the three months to May compared to last year, is tied for the highest growth rate on record alongside April’s figures.

Prospect of Relief for Bank of England as Inflation Heats Cool

Economists had anticipated a 7.1% increase, indicating a stronger-than-expected rise that leaves the BoE on track for its 14th consecutive interest rate hike, possibly by another half-percentage point on August 3.

The data also reveals that the BoE closely monitors wage growth, assessing the remaining inflationary pressure in the UK economy. In May, consumer price inflation stood at 8.7%, higher than in any other major developed economy.

Governor Andrew Bailey emphasized the rapid rise in wages and prices companies charge and expressed his determination to address the situation. However, there are indications of a labor market slowdown that may temper inflationary pressure.

The unemployment rate unexpectedly rose to 4.0% in the three months to April, an increase from 3.8%, with the number of jobless individuals seeing its largest rise since late 2020. Moreover, job vacancies have declined, reaching their lowest level since mid-2021.

Analysts suggest that the BoE’s Monetary Policy Committee (MPC) could identify sufficient signs of a slowdown in the data to potentially pause the rate hike cycle, although this might not occur in August.

While wages continue to rise too quickly for the MPC to tolerate in the long run, changes in labor market slack historically take time to influence wage growth. Nevertheless, some leading indicators remain positive, providing hope for the labor market outlook.

Annual Pay Growth Reaches Record Level Excluding Pandemic Period

In addition to the surge in basic earnings, annual pay growth, including bonuses, accelerated to 6.9%, the highest rate on record when excluding the pandemic period distorted by government job subsidies, according to the Office for National Statistics (ONS).

Other data points indicate a loosening of inflationary pressure, such as a decline in the inactivity rate (reflecting those out of work and not seeking employment) to its lowest level since the onset of the pandemic in 2020.

The developments in wage growth, inflation, and labor market indicators hold implications for the BoE’s monetary policy decisions and the prospects of future rate hikes.

Sterling has strengthened, reaching a 15-month high against the US dollar, while yields on two-year British government bonds have declined, suggesting reduced expectations for the extent of rate hikes by the central bank.

Market forecasts indicate approximately a 50% chance of the BoE’s benchmark rates reaching a peak of 6.5% in early 2024, up from the current 5%.

Conclusion:

The latest data from the UK indicates a surge in wage growth, highlighting strong momentum but also raising concerns about inflationary pressure. However, signs of a slowdown in the labor market, including rising unemployment rates and declining job vacancies, offer potential relief for the Bank of England.

The central bank closely monitors wage growth as a key factor in assessing inflationary pressure. Analysts suggest that the Monetary Policy Committee might consider pausing its current cycle of interest rate hikes, but it may take additional time for changes in labor market slack to impact wage growth significantly.

The developments in wages, inflation, and labor market indicators will shape the BoE’s future monetary policy decisions and the outlook for interest rates in the UK.