There’s a hawkish undertone to this morning’s labour market figures which may concern the Bank of England.
Wages slowed, but not by as much as both the City and the Bank of England had expected. Unemployment is actually lower now than it was a year ago despite the pressure from higher interest rates.
“Overall, a stronger-than-expected UK labour market report,” analysts at Nomura concluded.
The big question is what does this mean for the Bank of England. Policymakers have repeatedly stressed that wage growth needs to slow in order to be certain that inflation will return sustainably to the two per cent target.
We know that rate cuts are a “when rather than an if,” but does slightly stronger than expected wage growth change the calculation around cutting interest rates at all?
In the final quarter of last year, regular pay growth dropped to 6.2 per cent from 6.7 per cent, above the Bank of England’s forecast of six per cent. Not a big overshoot, but an overshoot nonetheless.
What’s more, it’s clearly too high to be consistent with the two per cent inflation target – particularly when productivity is in the doldrums.
However, more recent figures suggest wage growth has slowed rapidly.
Private sector regular pay rose only 2.5 per cent at an annualised rate in the final quarter of the year, a rate consistent with the target.
“The recent slowdown in wage growth remains intact,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
The most surprising feature of the labour market figures was a fall in unemployment. According to the ONS, unemployment fell to 3.8 per cent in the final quarter of last year, from 3.9 per cent previously.
This means that unemployment has fallen from a post-Covid peak of 4.3 per cent last July. A lower unemployment rate will raise concerns that wage growth will remain persistent over the year ahead.
However, the ONS noted that quarterly changes should be interpreted with “additional caution” given the continued problems it faces with low response rates.
Tombs said the figure looks “particularly suspect” when compared to survey data. The Chartered Institute of Personnel and Development’s outlook, released yesterday, showed that employers are planning to offer workers smaller pay rises than last year. This would be the first easing in pay growth since the pandemic.
According to the KPMG-REC jobs survey, starting salary inflation slipped to a 34-month low in January.
Vacancies fell for the nineteenth consecutive quarter, the longest run of consecutive falls on record. Although the pace has slowed, it still means there are comfortably more jobseekers than there are vacancies.
“If this trend continues, wage growth is likely to gradually return to historical levels in the medium-term.” Paula Bejarano Carbo, economist at the National Institute for Economic and Social Research, said.
Given all this, these figures are unlikely to put pay to a May rate cut – the market’s current expectation.