Record wage growth could see another interest rate rise from Bank of England

Record wage growth could see another interest rate rise from Bank of England

11 Jul    Finance News, News

It seems strange to cheer what economists call a “loosening in the labour market”.

What that basically means is: employment growth is slowing, joblessness is on the up, vacancies falling and wage growth receding.

It seems strange to cheer what economists call a “loosening in the labour market”.

In a shock to the City, the unemployment rate in the three months to May climbed to four per cent from 3.8 per cent in the previous three months.

Employment volumes grew a shade over 100k over the same period, a slow down from the 250k additional people who found a job in the preceding quarter.

Vacancies whittled down 85k, but are still over 1m, historically very high.

Among the strangest things in this latest labour force snapshot was that wages are still growing at a record pace of 7.3 per cent. The ONS upgraded its earlier estimate for pay growth in the previous months to that rate.

This shouldn’t be the case. An increase in the number of people available for a job should take some bargaining power away from workers by increasing competition between them.

Economic inactivity fell 141k, meaning there should be about 40k more Brits looking for a new gig.

There were fewer vacancies for every unemployed person in the UK, with the ratio falling to 0.77. At its peak, the gauge was over 1, illustrating how strong demand for labour has been coming out of the pandemic.

“While this ratio remains low by historical standards, this quarterly increase suggests a slight easing of recent tightness in the labour market,” the ONS said in its release.

So it is peculiar that pay acceleration is beating everyone’s expectations. Perhaps that suggests workers’ mindsets have shifted toward expecting higher inflation in the future, compelling them to demand bumper settlements. But data from the Bank of England suggests this isn’t the case.

What is even more striking is that record pay growth is still being outstripped by rising prices. When accounting for the consumer price index, the UK’s official inflation measure, real wages fell 1.7 per cent over the last three months.

That trend has been playing out in the economy for more than a year and a half now.

Workers should get set for yet more pain to come.

Unfortunately, 7.3 per cent wage growth is just way too high for the Bank of England. In its latest policy statement, it said it would only stop increasing interest rates if pay and services inflation ebbed.

The former of those two variables most certainly is not.

We may be in store for a repeat of last month’s 50 basis point rate increase on 3 August.

Whether the Bank sends rates to a peak of 6.5 per cent, as financial markets expect, will wholly depends on getting pay growth and services inflation back down – fast.

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