U.K. Wages Rise Most Since 2015 as End to Squeeze Nears

Updated on
  • Stronger wage growth, slower inflation is good for consumers
  • Unemployment declines to 4.2%, lowest rate since 1975

JPMorgan's Lafargue Says 2 BOE Hikes Would Be a Surprise

U.K. wages are rising at their fastest pace in almost three years, raising the prospect of an end to the squeeze on living standards.

Annual pay growth excluding bonuses accelerated to 2.8 percent in the three months through February, the Office for National Statistics said Tuesday. Inflation averaged 2.9 percent in the same period and is forecast to fall toward 2 percent this year.

The return of real-income growth will be good news for hard-pressed households after more than a year of wages lagging behind prices. That suppressed consumer spending in 2017, holding back overall economic growth.

Almost Over

The squeeze on British wages that began nearly a year ago is coming to an end

Source: Office for National Statistics, Bloomberg calculations

The wage figures may reinforce speculation that the Bank of England will raise interest rates again next month, despite the economy being disrupted by bad weather in the first quarter. Officials fear home-grown inflationary pressures are building as labor shortages leave firms struggling to fill vacancies.

While a hike next month is almost certain, “what happens thereafter is less clear,” said James Smith, an economist at ING in London. “Brexit talks still have the potential to get noisy in the autumn. Coupled with ongoing economic fragility, this could complicate efforts to hike again later in 2018.”

Employment rose to a record high between December and February after the economy added 55,000 jobs, the ONS figures showed. The jobless rate fell to 4.2 percent, the lowest since 1975 and below the BOE’s estimate of the equilibrium rate.

Not Convinced

The pound fell slightly after the data were released as wage growth including bonuses fell short of expectations, holding at 2.8 percent. Earlier, the pound touched its highest level against the dollar since the U.K. voted to leave the European Union. It traded at $1.4329 as of 10 a.m. in London.

Sterling’s 14 percent gain over the past year has helped to suppress inflation, reversing some of the impact of the currency’s decline in 2016. Using a measure of inflation that includes owner-occupier housing costs, pay growth actually overtook inflation between December and February.

Few, however, expect any immediate effect on spending, with consumer activity -- and the economy as a whole -- forecast to see the weakest growth in years in 2018.

In February, the jobless rate fell to an all-time low of 4 percent private-sector regular wage growth hit 3 percent. The inactivity rate also declined to a record low.

But while a May BOE rate increase is all-but priced in by investors, not everyone is convinced that the labor market is running out of slack.

A study co-authored by former policy maker David Blanchflower argued this week that there are still a significant number of people seeking more hours, meaning unemployment may have to fall below 3 percent before wage growth picks up any serious traction.

— With assistance by Harumi Ichikura, Mark Evans, and Fergal O'Brien

    Quotes from this Article
    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE