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UK wage growth slowed in the three months to November, according to official data that suggests inflationary pressures had already eased by more than the Bank of England thought when it published its most recent forecasts for the economy in November.
The annual pace of growth in average earnings, including bonuses, slowed to 6.5 per cent in the three-month period, the Office for National Statistics said on Tuesday. That was down from a summer peak of 8.5 per cent and compared with a pace of 7.2 per cent in the three months to October.
Meanwhile annual growth in earnings excluding bonuses slowed to 6.6 per cent, in line with analysts’ expectations and compared with 7.3 per cent the previous month.
Chancellor Jeremy Hunt said it was “heartening” that this meant wages had now risen faster than prices for five consecutive months.
However, UK rate-setters are watching wage growth closely because they believe pay increases could keep inflation high, despite easing energy and food price rises. In November, inflation stood at 3.9 per cent.
The BoE said in November that it expected annual private sector regular pay growth to fall to about 7.25 per cent in the fourth quarter of 2023, before declining “markedly” to roughly 5 per cent by the end of 2025.
However, the central bank will probably want to see clearer and more sustained evidence of pay pressures easing before it feels confident that it can start cutting interest rates from their current level of 5.25 per cent.
Ashley Webb, economist at the consultancy Capital Economics, said the “big drop in wage growth” suggested “domestic inflationary pressures are fading fast” but added that tightness in the jobs market would “probably mean that the BoE maintains its hawkish bias” at next month’s policy meeting.
Thomas Pugh, economist at audit firm RSM UK, said the sharp drop in wage growth could “set the stage for the first cut in interest rates to come as early as May” since there were now “clear signs that the economy is on the edge of recession, inflation is falling faster than expected” and also “evidence that the labour market is easing”.
Ben Broadbent, BoE deputy governor, said in December that because much of the official labour market data usually scrutinised by policymakers was unavailable, the bank’s Monetary Policy Committee would “require a more protracted and clearer decline” before it could conclude things were “on a firmly downward trend”.
Rate-setters are finding it hard to gauge how much the jobs market has weakened as higher interest rates weigh on economic activity, because the ONS has for several months been unable to publish a full set of data as it struggles to overcome problems with the labour market survey that underpins it.
For now, the agency is publishing stop-gap figures based on tax and benefits records. It said on Tuesday that these alternative measures suggested unemployment had remained steady at 4.2 per cent on the quarter, while employment rose by 0.1 percentage point to 75.8 per cent.
An alternative measure of employment showed that the number of payrolled employees fell slightly in December, after rising slightly in upwardly revised figures for November.
The ONS also said the number of vacant jobs in the economy had continued falling in the three months to December — extending the longest-running decline on record — but remained above pre-Covid levels.
The agency’s efforts to begin publishing more comprehensive data are running behind schedule. It said last week that it needed more time to run quality checks and would delay publishing fuller figures until next month.
It was also vague about the timetable for moving to the new “transformed” labour force survey that is meant to replace the faulty one, saying it would share “indicative analysis” ahead of the transition in the spring.
“We will likely have to wait a few more months before we can be confident in labour market dynamics. This could be problematic for the MPC, which may ultimately be forced to initiate the cutting cycle without a clear read on official labour market data,” economists at Barclays wrote this week.