U.K. Labor-Cost Pressures Look Hotter Than BOE Had Expected

  • ONS revises unit labor cost growth higher in first half
  • Data has implications for BOE analysis of inflation pressures

U.K. labor-cost pressures are stronger than the Bank of England anticipated, giving policy makers an extra incentive to begin raising interest rates for the first time in decade.

Annual growth in unit labor costs was 2.4 percent in the second quarter, the Office for National Statistics said on Monday. It revised the number up from a 1.6 percent rate published last week after an error was found in the data. The first quarter was revised to 3.5 percent, the fastest in almost four years.

The new figures could have implications for monetary policy. BOE Governor Mark Carney has said it may soon be time to increase the benchmark interest rate from a record-low 0.25 percent, and there’s a chance it could act as soon as its next meeting in early November.

As the news of the revision filtered through to markets on Monday, traders moved to price in an 86 percent chance of a rate rise in November, up from 83 percent on Friday. A second hike is now fully priced in for August 2018.

A rate increase would partly be a response to inflation, which has accelerated after the pound’s slump in 2016 pushed up import costs. It was at 2.9 percent in August, above the BOE’s 2 percent target.

But while the currency impact could be temporary, the faster increases in labor costs suggest a buildup of domestic inflation pressures. The central bank forecast in August that unit labor cost growth would probably only average 1.25 percent this year and 1.75 percent in 2018. It said at the time that it would probably “remain below rates consistent with inflation at target in the near term, before recovering further ahead.”

The cost pickup may reflect the fallout from Britain’s weak productivity performance in recent years. The ONS data on Friday also showed that output per hour fell for a second consecutive quarter in the three months through June, slipping 0.1 percent. Over the long term, the U.K. is lagging its peers, with productivity more than 15 percent below the Group of Seven average.

Weak productivity is seen as a factor restraining U.K. wages even with unemployment at the lowest in more than four decades. The BOE has said that while it expects pay growth to improve, it’s “likely to remain below its pre-crisis average rate, largely reflecting continued subdued productivity growth.”

The ONS was forced to revise its unit-labor cost estimate after discovering that it was based on outdated labor-income data.

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