Photographer: Simon Dawson/Bloomberg

The U.K. Rate-Increase Argument Just Got Stronger

Wage measure reaches level needed to push inflation back to target

The inflationary effect that Bank of England officials have been hoping for may be finally arriving.

Data released Thursday showed unit labor costs rose an annual 2.2 percent in the second quarter, the fastest pace since in almost three years and up from 0.3 percent in the previous three months.

The pace is also about the level that BOE Deputy Governor Ben Broadbent has said is needed to drive inflation -- currently lodged at zero because of falling oil prices -- back up to the central bank's goal. 

Separate data this week showed compensation of employees rose 4.7 percent in the second quarter, the biggest annual increase since 2007. BOE Governor Mark Carney has said that if labor costs and wage growth continue to rise and core inflation accelerates, then it may be appropriate to start withdrawing stimulus early next year.

The pickup in labor costs, which account for about two thirds of total production costs in the U.K., suggests companies are having to increase incentives to retain and attract workers as the economy strengthens.

Philip Rush at Nomura in London said the MPC should ``draw comfort'' from the labor-cost data that underlying inflationary pressure is back at levels consistent with the target. ``With spare capacity still falling and average weekly earnings rising, there is pressure for the MPC to get going with the hiking cycle,'' he said.

Just one BOE policy maker, Ian McCafferty, voted to raise benchmark borrowing costs from 0.5 percent last month. The Monetary Policy Committee announces its next decision on Oct. 8.

``The fact that the unit labor cost box has been ticked gives me some comfort that the first hike is not a year away, it’s probably months, not a year, away,'' said  Alan Clarke, an economist at Scotiabank in London. "There's always a danger that this is a bit of an over-reaction, and you might get a bit of a payback in the third quarter, but we're pretty much where we need to be.''

 

 

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