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Cooling UK Wages Bolster Prospects for Sharper Drop in Inflation - BLOOMBERG

JANUARY 16, 2024

BY  Tom Rees and Philip AldrickBloomberg News


(Bloomberg) -- UK wage growth cooled at one of the fastest paces on record, supporting the case for the Bank of England to start cutting interest rates in the coming months.

Regular pay growth, which excludes bonuses, eased to 6.6% in the three months through November, the Office for National Statistics said Tuesday. That was in line with expectations and a fall from a downwardly revised 7.2% in the previous three month period.

Another sharp reduction in wage pressures adds to the case for an early interest rate cut, with economists expecting inflation to near the BOE’s 2% target by the spring. An ultra-tight labor market and rapid pay growth have been a key worry for rate-setters looking for signs that a wage-price spiral may persist.

“The marked slowdown in pay growth will ease the Bank of England’s concerns of a potential wage-price spiral, which could lead to faster falls in inflation,” said Yael Selfin, an economist at KPMG UK. “Vacancies are also expected to fall further. This will likely bolster the case for interest rate cuts later this year.”

The pound slipped after the release, compounded by a broadly stronger dollar. It traded as much as 0.5% weaker, touching a more than one-week low of $1.2663.

The data did little to change the market’s expectations for rate cuts by the BOE. The first quarter-point decrease is virtually fully priced by May, and at least four more cuts are expected through the end of the year.

What Bloomberg Economics Says ...

“The big step-down in private sector pay growth in the latest batch of UK jobs data will give the Bank of England greater confidence that risks of inflation persistence are abating. It also raises the chances of the central bank softening its policy stance at its next meeting — in February. Our base case is the BOE’s first rate cut will come in May, with borrowing costs set to end the year at 4% — that’s down from 5.25%, currently.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

Economists expect the Bank of England to cut its benchmark rate by 25 basis points in the second quarter to 5%, earlier than previously expected, according to a new survey conducted by Bloomberg News. The median is for a 53% chance the economy will slip into recession.

However, in recent weeks Governor Andrew Bailey has stuck with the BOE’s higher-for-longer message, saying officials have a way to go before they can be sure they’ve contained price pressures.

Chancellor of the Exchequer Jeremy Hunt said the figures prove that households are starting to feel better off. The figures also showed some increase in real living standards, easing the tight squeeze that prevailed over much of the past two years. That could help the ruling Conservative Party narrow the gap with the Labour opposition in polls ahead of a general election expected later this year.

“It has been tough for many families recently, but with inflation now falling and the economy gradually returning to growth today’s continuing rise in real wages will offer further relief,” Hunt said in a statement. “On top of this the cut in National Insurance contributions will get more people back into the jobs market, not just supporting economic growth but saving a typical two earner household around £1,000 this year.”

Regular pay rose by 1.4% in the three months through November after adjusting for CPI inflation. That was the fastest pace since January 2020 excluding distortions during the pandemic.

“While annual pay growth remains high in cash terms, we continue to see signs that wage pressures might be easing overall,” said ONS director of economic statistics Liz McKeown. “However, with inflation still falling more quickly, earnings continued to grow in real terms.”

Aside from the period distorted by the pandemic, the easing in wage growth matched the fastest drop in records stretching back to 2001. It was also the first reading below 7% in eight months. Even so, the BOE has said that wage growth is well above the level that’s compatible with its 2% inflation target. 

The ONS said that its experimental data showed that unemployment held at 4.2%. It’s still using experimental estimates for unemployment, employment and economic activity figures after being forced to suspend its Labour Force Survey by a plunge in responses. It expects to reintroduce the LFS in next month’s publication with the data problems coming at a crucial time for policymakers at the BOE.

The report also showed:

  • Vacancies also fell by 49,000 in the quarter to December to 934,000, a further loosening of demand in the jobs market.
  • The number of employees on payroll dropped 24,000 in the quarter through December after a a revised increase of 9,000 the month before.
  • Employment picked up to 75.8% of working-age adults, according to the experimental data.
  • The ONS said that 69,000 working days were lost to strikes in November, the lowest number in 18 months. However, widespread industrial action returned to be a drag on the economy in December and January.

There was also a sharp easing in wage pressures in the private sector, which are being watched closely by the BOE for signs of a tight labor market. Private sector regular pay growth cooled to 6.5%, down from 7.2%. That’s also the fastest drop on record aside from the pandemic.

Regular private sector pay has fallen more rapidly than in the public sector, which – excluding distortions during Covid — is now enjoying larger gains for the first time since just before the pandemic began in early 2020.

“While there continue to be signs that the labour market is softening, it is happening slowly.” said Matthew Percival, future of work director at the CBI employers group. “Today’s data confirms that many businesses are still struggling to hire the people that they need, leading to higher employment costs that are putting pressure on prices.”

Economists expect inflation to come close to the BOE’s 2% target by the Spring, according to a survey of economists by Bloomberg published on Tuesday. Inflation is expected to ease from 3.6% in the first quarter of 2024 to 2.1% in the second quarter.

Economists now expect this cooling in price pressures to lead to the first rate cut in the second quarter with further reductions bringing the BOE’s key lending rate to 4.25% in the fourth quarter.

--With assistance from Harumi Ichikura and Constantine Courcoulas.

(Updates with economist survey.)


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