Booming Wage Growth May Trigger Another Increase in Interest Rates by the Bank of England

The UK labour market is experiencing a slowdown, as employment growth slows and vacancies continue to remain over one million, a historically high figure. According to the Office for National Statistics (ONS), employment volumes grew a shade over 100k over the same period, a significant slowdown from the 250k additional people who found a job in the preceding quarter.

The unemployment rate in the three months to May climbed to 4% from 3.8% in the previous three months, indicating a rise in joblessness. This trend is unusual, as the unemployment rate is increasing while wages are still growing at a record pace of 7.3%.

Despite the slowdown, the former of those two variables (pay growth) is not ebbing. The ONS upgraded its earlier estimate for pay growth in the previous months to 7.3%, among the strangest things in this latest labour force snapshot. Workers' mindsets may have shifted toward expecting higher inflation in the future, compelling them to demand bumper settlements.

The European Central Bank (ECB) raised interest rates last month and expects wage and service price inflation to quickly fall to a minimum. However, the Bank of England expects pay growth to continue. The Bank's data suggests this isn't the case, as there were fewer vacancies for every unemployed person in the UK, with the ratio falling to 0.77.

The Bank of England would only stop increasing interest rates if pay and services inflation ebbed. Among the strangest things in this latest labour force snapshot was that wages are still growing at a record pace of 7.3%. This trend of falling real wages has been playing out in the economy for more than a year and a half.

When accounting for the consumer price index, real wages fell 1.7 per cent over the last three months. Record pay growth is still being outstripped by rising prices. The Bank of England may be in store for a repeat of last month's 50 basis point rate increase on 3 August, as whether the Bank sends rates to a peak of 6.5 per cent, as financial markets expect, will depend on getting pay growth and services inflation back down - fast.

The slight easing of recent tightness in the labour market, as stated by the ONS, may be a sign of this trend reversing. However, for now, the labour market continues to show signs of slowing, while wages remain high. Economic inactivity fell 141k, meaning there should be about 40k more Brits looking for a new job. This could potentially lead to a further easing of the tight labour market conditions in the future.

Booming Wage Growth May Trigger Another Increase in Interest Rates by the Bank of England