Unemployment up and wage growth still hot: New figures to spook Bank of England
Wage growth came in hot yet again in the three months to July, causing a headache for rate-setters at the Bank of England.
According to figures from the Office for National Statistics, annual pay growth excluding bonuses averaged 7.8 per cent between May and July, the same as the previous three month period and the joint highest rate of pay growth since records began in 2001. Including bonuses, earnings growth came in at 8.5 per cent.
“Earnings in cash terms continue to increase, at a record rate outside the pandemic-affected period,” Darren Morgan, director of economics statistics at the ONS said.
Yael Selfin, Chief Economist at KPMG UK, said pay growth “continues to present a conundrum for the Bank of England”.
The Bank has been persistently surprised by the strength of wage growth over recent months, which has raised the prospect of a wage-price spiral, which is when workers demand higher wages to keep up with inflation, forcing firms paying wages to hike costs further.
High wage growth makes it difficult for the Bank to return inflation to its two per cent target and today’s data is likely to mean at least one further rate hike to come.
Chancellor Jeremy Hunt said: “Wage growth remains high, partly reflecting one-off payments to public sector workers, but for real wages to grow sustainably we must stick to our plan to halve inflation.”
However, in a sign that the Bank’s interest rates hikes are starting to loosen the labour market, the unemployment rate increased to 4.3 per cent – up from 4.2 per cent previously.
The increase was largely driven by people unemployed for up to 12 months.
Speaking to MPs last week, Jon Cunliffe, deputy governor at the Bank, said that the labour market was only seeing a “slow cooling”. Cunliffe and governor Andrew Bailey both highlighted developments in the labour market as crucial for the future path of interest rates.
Economists suggested that the data would not be enough to dissuade the Bank of England’s Monetary Policy Committee from a further 25 basis point rate hike when it meets later next week.