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British wages grew at their slowest pace in almost two years, official data showed on Tuesday, which could reassure the Bank of England that inflation pressures are easing, and unemployment also unexpectedly fell.
The Office for National Statistics said average weekly earnings excluding bonuses were 5.4% higher in the three months to the end of June than a year earlier, down from 5.8% in the three months to May and the lowest level since August 2022.
However, according to a survey currently being revised by the Office for National Statistics, the unemployment rate fell to 4.2% from 4.4%, the lowest level since February, contrary to expectations in a Reuters poll of economists for a rise in the jobless rate.
GBP/USD strengthened immediately after the data was released.
The Bank of England cut interest rates on Aug. 1 after keeping them at a 16-year high of 5.25% for nearly a year and said it would continue to monitor wage growth closely. Investors see about a one-in-three chance of a September rate cut.
Wage growth is still nearly twice the pace the Bank of England says it needs to maintain its 2 percent inflation target. Data on Wednesday may show inflation is rising back above that target.
“Today’s data is consistent with a gradual and cautious reduction in restrictive policy,” said Sanjay Raja, chief UK economist at Deutsche Bank. “However…if GDP growth remains strong, this could lead to a stronger recovery in the labor market, leading to a more gradual cycle of rate cuts.”
Employment increased by 97,000, well above the 3,000 increase economists had forecast.
Raja said the fall in unemployment could be partly attributed to slight overstating of the unemployment rate in the past by the National Bureau of Statistics, which said the response rate to its Labour Force Survey had improved since the beginning of the year.
The Resolution Foundation think tank said it was concerned that the ONS was still underestimating employment.
Salary pressure eased?
Employers expect lower overall inflation to ease wage pressures. The Chartered Institute of Personnel and Development said on Monday that employers expect wage increases of 3%, the lowest in two years.
Last month, Britain’s new finance minister, Rachel Reeves, approved a pay rise of at least 5% for millions of public sector workers.
The Bank of England is paying more attention to wage growth in the private sector, predicting that wage growth in this sector will slow to 5% by the end of 2024 and to 3% by the end of 2025.
Normal private sector wage growth slowed to 5.2% in the three months to June, the slowest pace since May 2022, from 5.6% in the three months to May.
Workers are now better off after adjusting for lower inflation. Real wages, net of bonuses, are 3.2% higher than a year ago, the biggest annual gain since mid-2021.
The average earnings increase, which includes bonuses and other one-time payments, fell sharply to 4.5%, the lowest level since the end of 2021, reflecting back payments to public health workers from a year ago.
Public sector regular wage growth slowed to a five-month low of 6.0% from 6.4%.
The Bank of England is also watching other inflationary pressures, such as labor shortages, which have risen sharply during the COVID-19 pandemic.
The number of unfilled job vacancies fell to a three-year low of 884,000 in the three months to July, down from 1.3 million in mid-2022 but still higher than at the beginning of 2020.
“Many job openings remain difficult to fill, with near-record highs of 9.4 million working-age people inactive remaining a key factor,” said Jack Kennedy, senior economist at recruitment platform Indeed.
The proportion of working-age people who were neither in work nor unemployed due to ill health, full-time study, caring responsibilities or other factors rose slightly to 22.2% in the three months to June, close to its highest level in eight years.
The new government wants to raise the labor force participation rate to 80% – a level already reached by the Netherlands, Switzerland and New Zealand but falling short of other larger economies.
Reeves said Tuesday’s data showed the importance of getting more people employed.
“This will be part of my budget later this year, when I will make difficult decisions about spending, benefits and taxes,” she said. The budget will be released on September 30.
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