The UK wage growth in May slowed to its lowest level in the past two years, amid a cooling job market. This highlights the challenges facing the Bank of England in deciding whether or not to reduce interest rates.
The Office for National Statistics has released figures showing that the annual wage growth rate has slowed from 5.9% to 5.7% over the last three months, which is in line with predictions made by City economists.
The unemployment rate remained unchanged at 4.4%, but the number of job openings fell by 30,000 due to a decline in demand for retail and hospitality jobs amid an ongoing slowdown in hiring in the entire economy.
After a sharp drop in headline inflation during the past few months, real wage increases that take into account rising costs of living have strengthened. In the three-month period ending in May, total real pay including bonuses rose by 3% over the previous year. The last time the growth was higher was in the three-month period ending August 2021 when it was at 4.5%.
Liz McKeown is the ONS’s director of economic statistics. She said that there are signs of a slowdown in the labour markets, as the number of people on payroll is decreasing over the medium-term and the unemployment rate is increasing.
While still relatively high, the growth of earnings in cash terms is beginning to slow down. In real terms, however, it has reached its highest level in more than two and half years.
The latest snapshot shows that there are now over 500,000 people unemployed compared to this time last. This is due to an increase in economic inactivity, when adults of working age do not have a job or are actively looking for one.
Despite a slight decline in economic inactivity in recent months it is still close to a high record at 9.4 million. Nearly a third of the population are not in the workforce because they have long-term illnesses that are near records.
Liz Kendall, new Work and Pensions Secretary, said that the UK stood alone as the sole G7 nation where employment rates were not back to levels before the pandemic. She said, “This is an incredibly dire legacy that the government is determined” to address.
Behind these statistics, there are real people who have been denied the help and support they require to enter and succeed in work for far too long. “It’s time to change.”
The financial markets believe that Bank policymakers won’t cut interest rates at their meeting of 1 August from the current level, which is 5.25%. Instead, they will wait until they feel confident that inflation will stay close to the government target of 2% before cutting the cost of borrowing.
Threadneedle street has warned before that inflation will likely rise to above 2% in this year due to the resilient wage growth, and the price increases of the service sector.
These figures follow headline inflation remaining at 2% for the second consecutive month, and underlying measures in the service sector holding steady. This is likely to dampen hopes of a rate cut in August.
The Bank of England’s inflation target is 2%. Although wage growth has slowed, it remains at 5.7%. This is not in line with economists. Ashley Webb, UK economist with Capital Economic, says the slowdown on the jobs market is probably not enough to offset the strength of services inflation.
He said that “as a consequence, we changed our forecast of the timing for the first interest-rate cut from 5.25% to September. Although it’s a close call, it is still a very good prediction.”
Huw Pill, the Bank’s chief economist and member of its monetary policy committee warned that service sector inflation could cause Threadneedle Street, the Bank, to adopt a cautious approach.
The European Central Bank was the first global central bank in the world to reduce the cost of borrowing for official purposes. It left rates unchanged on Thursday.
Jerome Powell of the US Federal Reserve, who chairs it, hinted this week that they would not wait until US inflation drops to their 2% target rate before cutting rates. This boosted expectations for a September cut.
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