UK wages continue to lag inflation, putting ball in Bank of England court

UK wage growth continues to lag behind inflation, official figures showed on Wednesday, though shifts in the level of employment mean the Bank of England's decision on whether to raise rates in November is "on a knife edge", some economists feel.

Average weekly earnings grew 2.2% for the three months to August compared to the same period last year, which was the same as had the three months to July, which the Office for National Statistics revised up from its initial estimate of 2.1%.

Average wage growth excluding bonuses softened to 2.1% from a revised 2.2% but was ahead of the market estimate of 2%.

Consumer price inflation in August was 2.9% and rose to 3.0% in September, meaning the squeeze on real incomes remained fierce.

However, month-on-month private-sector wage growth, excluding bonuses, jumped to 3.7% in August from 1.8% in July - though this is a volatile measure.

The headline ILO unemployment rate for the last three months remained at 4.3%, the joint lowest since 1975, though employment numbers gained 94,000 in the three months to August, the smallest increase since February.

The more timely claimant count rate, showing data for September, remained at 2.3%, with jobless claims rising 1.7K.

Sterling climbed 0.3% against the dollar to 1.3312 in the minutes immediately after the data, but remained unmoved on the euro at 1.1205 after a small initial spike.

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These "decent" numbers "keeps the MPC on course for a November rate hike", said Andrew Wishart at Capital Economics, noting that the single month annual figure for August rose from 2.1% to 2.2%, only marginally lower than the Montetary Policy Committee’s forecast for wage growth to reach 2.25% in the fourth quarter.

"As a result, we continue to think that the Committee will follow through with its pledge to raise interest rates 'over the coming months' and think that the first 25 basis point hike will come in November."

Based on a forecast for average earnings growth to pick up more momentum next year, Capital Economics envisaged three further hikes in 2018.

For Samuel Tombs at Pantheon Macroeconomics, the MPC decision was "on a knife-edge" as labour market data "continue to give the MPC reasons both to tighten policy and to stand pat in November".

On the one hand, he said the rate at which labour market slack is being absorbed has slowed, with the 94k employment gain the smallest increase since February, with part-time self-employed roles accounting for 70K of the increase in employment and the proportion of part-time workers wanting full-time work increased to 12.3% and the number of job vacancies having flatlined, "consistent with only weak growth in employment ahead".

On the other, the 3.7% rate of wage growth in August surprising to the upside, with the MPC having placed weight recently on this volatile measure.

"The recent fall in consumer confidence, meanwhile, likely will mean that fewer workers quit for new positions, easing the pressure on employers to pay staff more to retain them," Tombs said.

"Accordingly, we doubt that August’s uptick in wages is the start of a stronger trend, but it might be the last straw for some members of the MPC itching to raise rates."

Laith Khalaf, a senior analyst at Hargreaves Lansdown, said the Bank of England will be wary of the fragile state of the UK consumer as it mulls any interest rate move.

"On the one hand the Bank doesn’t want to heap pressure on borrowers by raising rates, potentially slowing economic growth from an already glacial pace. On the other hand, consumer borrowing is rising at quite a clip, and inflation is also heading in the wrong direction, both of which suggest a rate rise is in order.

"So the Bank of England is caught between a rock and a hard place.

"Markets have bought into the hawkish rhetoric emanating from the central bank of late, and are now pricing in a rate rise before the end of this year. The Bank of England does have form for disappointing spectators on this front, however looking out beyond a potential rate hike in the next few months, the longer term picture is still one of low interest rates dominating the economic landscape for some time to come."