Wage growth edges above inflation in 'final piece of puzzle' for BoE hike
British wage growth numbers disappointed the market on Tuesday but finally crept higher than inflation, meaning real wage growth has turned positive for the first time in 13 months to give the Bank of England more confidence about raising interest rates.
UK average weekly earnings rose 2.8% in the three months to February compared to the same period last year, which was unmoved from growth figures a month earlier but short of the 3.0% expected by economists.
Excluding bonuses, average weekly earnings growth improved to 2.8% from 2.6% a month ago, as the Bank of England forecast for the first half of 2018 and economists expected.
Both measures overtook consumer price inflation, which came in at 2.7% for February, as unemployment was also confirmed as having fallen back to 4.2%, its joint-lowest level since 1975.
With 32.26m people in work during the three months to February, up 55,000 more than the preceding three month period and 427,000 more than for a year earlier, the employment rate rose to 75.4%, which is the highest since comparable records began in 1971.
More recent data on the claimant count rate showed this remained at 2.4% in March, with a 11.6K increase in jobless claims compared to the revised 15.1K from the month before.
"The labour market continues to be strong, and for the first time in almost a year, earnings have grown slightly after inflation has been taken into account," said ONS statistician Matt Hughes.
IMPLICATIONS FOR INTEREST RATES
Economists felt the wage growth was the missing piece of the puzzle for the Monetary Policy Committee to raise rates.
While the headline wage growth was unchanged and short of the consensus forecast, Peter Dixon, senior economist at Commerzbank said the ONS data was perhaps not quite as strong as had been anticipated but generally positive.
“From a BoE perspective, the fall in the jobless rate strengthens the case of those who believe the economy is running with too little spare capacity and the fact that wage growth is now also marginally ahead of the inflation rate will also be used as an argument for a May rate hike," he said.
"However, real wages have lagged productivity growth over the past decade – despite the fact that productivity has been extremely weak over this period, which highlights the squeeze under which households have been operating. There was certainly nothing in this data to dissuade markets from the view that a rate hike is likely in May."
Ruth Gregory at Capital Economics said the labour market figures provided her team with optimism that "sustained rises in real wages are now in prospect and should seal the deal on another interest rate hike in May".
She said pay growth appears to be finally benefiting from the strength of jobs growth, though the annual growth rate in weekly earnings held steady at 2.8%.
"And with the surveys suggesting that recruitment difficulties are building and the latest pay settlement surveys also strong, a further acceleration in wage growth looks likely."
Tom Stevenson, investment director at Fidelity International, said: "With the final piece now in place the Bank of England now has the catalyst to be able to follow through on its plans to raise interest rates at the next MPC meeting in May and start the move back towards monetary normality."