As wage growth passes its peak experts are divided on the Bank of England’s next move
Policymakers at the Bank of England can take heart that things are slowly moving in the right direction after the Office for National Statistics (ONS) published its latest survey of the labour market.
Total pay growth averaged 7.9 per cent between July and September, down from 8.2 per cent in the previous rolling quarter, which was a much smaller fall than analysts were expecting.
Excluding bonuses, pay fell to 7.7 per cent from 7.8 per cent – in line with expectations.
Unemployment meanwhile remained stable at 4.2 per cent although the number of vacancies dipped below 1m, suggesting demand for workers was falling.
The overall impression is that slack in the labour market is growing, but only slowly.
“The story told in the latest numbers is one of labour market conditions loosening, but only very gradually, and wage growth slowly easing, but still at a pace above that consistent with the Bank of England’s inflation target,” Martin Beck, chief economic adviser to the EY Item Club said.
Interpreting data about the labour market has become all the more important after the Bank of England’s recent Monetary Policy Report.
In the report, the Bank justified its stance of keeping rates higher for longer by pointing to the tight labour market and higher levels of wage growth. Andrew Bailey was very clear that wage growth around eight per cent is inconsistent with the Bank’s two per cent target.
Yet interpreting the data is all the more difficult since falling response rates forced the ONS to start publishing “experimental” figures. This means it is unclear how much weight can be put on the latest figures for unemployment.
“There are numerous questions regarding how much signal the overall labour market report from the ONS provides, in its current form,” Ellie Henderson at Investec said.
“This is unhelpful at a time where labour market statistics are vital to assessing whether further interest rate hikes are needed to quell above-target inflation.”
The question now that wage growth is past its peak is what will happen over the coming months.
Predictably, economists are divided.
Yael Selfin, chief economist at KPMG UK, argued that wage growth will “ease in the coming months on the back of waning demand”.
Similarly, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said “the combination of further increases in labour market slack and falling inflation should help to slow wage growth materially.”
The Bank of England however takes the opposite view and expects wage growth to remain around its current levels for at least the rest of this year.
Ashley Webb, UK economist at Capital Economics, also suggested that wage growth will fall “only slowly”, meaning the Bank won’t be able to cut rates until late into next year.
Webb highlighted that forward indicators for wage growth, such as the Bank of England’s decision maker panel, point to high levels of wage growth well into next year.
The Bank of England is unlikely to start hiking rates again on the back of this morning’s figures, but it may give it increasing confidence that its higher for longer strategy is appropriate.
Markets will get a clearer indication of the state of play when October’s inflation figures are released tomorrow.