UK wages data point to more interest rate misery

Today’s UK employment numbers will have been both welcomed by the BoE while also read with disdain. The welcome news would have been the rise in the headline rate of unemployment to 4.0%, alongside a 25.7k print for jobless claims and a -9k fall in the measured number of payrolled employees. All three numbers are pushing in the same direction and suggesting a labour market that is finally starting to show signs of easing. However, the BoE will have read with disdain the earnings growth numbers, which showed headline average weekly earnings excluding bonuses unchanged at 7.3% (alongside an upwards revision to the April number), pointing to workers still managing to secure hefty wage rises despite the apparent cooling in the labour market as a whole. The BoE has consistently warned that high wages growth remains a significant obstacle to its efforts to bring inflation lower and today’s figures will do nothing to convince it that the labour market is no longer 'running too hot'. It will conclude that monetary policy needs to be tightened further.

Reasons for why wages are still rising are numerous. Clearly workers are looking to maintain standards of living in the face of a cost-of-living crisis. But possibly it also reflects attempts by companies to prevent skilled workers from leaving, raising the fear that the softer labour market the headline numbers are suggesting may not actually be being seen on the ground. Undoubtedly the BoE will read today’s rise in the jobless numbers with a pinch of salt given the strong revisions made to the payrolled employees numbers last month, and particularly in light of the increase in weekly hours worked that was also reported, up 4.5%, an outcome not normally associated with companies expecting to begin shedding labour. The dilemma for the BoE is that even if the overall rate of unemployment is rising, any boost this provides in its battle to bring CPI back to target will count for very little if hours worked and wages are both simultaneously rising, collectively putting more income into workers’ pay packets. It is not then a big step for it to conclude that significant work remains to be done to bring inflation back under control and this leaves today's report as potentially putting the UK on an upwardly revised interest rate trajectory.

However, read behind the numbers and the picture is a little less gloomy. The vacancies-to-unemployment ratio – frequently referenced by the BoE’s Monetary Policy Committee as the best indicator of labour market tightness – fell to 0.77 in May from 0.83 in April, and is now significantly below the peak of 1.05 seen in April last year. If this downwards trend is maintained, then the vacancies ratio will have fallen back to pre-covid levels by November. And with survey data reporting that businesses are starting to find it easier to recruit workers, there is no reason at the moment to suggest this trend will not be maintained. It is also prescient to remember that wages are typically the last component to adjust to changing labour market conditions. As hiring slows, so job-to-job moves will similarly slow, squeezing out the contribution to wages growth this labour market churn exerts while simultaneously easing pressure on employers to offer existing staff large wages rises. And of course, a sharp fall in CPI going forward will help to bear down on wages growth next year.

But all this aside, the evidence points to inflationary pressures having seeped into all corners of the UK economy and the risk is that workers, while benefiting from expected falling headline CPI going forward thanks mainly to falling energy and food prices, will continue to try and capture large increases in remuneration in an attempt to claw back real spending power already lost. The only solution the BoE has to combat this is to tighten monetary policy further. Accordingly, the likelihood of a further 50bps interest rate rise being delivered in August is now looking an increasingly likely outcome; and will become a nailed-on bet if we get a strong set of inflation numbers next week.