Mixed bag of UK jobs data presents "migraine" for Bank of England

(Alliance News) - The latest UK jobs data is likely to give the Bank of England a lot to think about ahead of its September meeting, with investors betting it will be troubled by the speed of wage inflation.

UK unemployment rose unexpectedly in the three months to June, while at the same time wage inflation accelerated more quickly than expected, figures from the Office for National Statistics showed on Tuesday.

The UK jobless rate rose to 4.2% in the three months to June. Market consensus, as cited by FXStreet, had expected it to remain unchanged from 4.0% in the three months to May.

However, while the headline unemployment figure showed some promise for the Bank of England's mission to tackle the tight labour market, the market was more focused on the wage inflation data.

In the three months to June, annual growth in average total pay, including bonuses, accelerated to 8.2% from the upwardly revised figure of 7.2% in the previous three-month period. June's figures overshot FXStreet-cited consensus of 7.3%.

"This total growth rate is affected by the NHS one-off bonus payments made in June 2023," the ONS noted.

Still, excluding bonuses, average earnings rose 7.8%, compared to the upwardly revised reading of 7.5% in the previous month. June's rise was above the consensus of 7.4%.

Notably, it would seem as though wage growth is beginning to catch up and even outpace the rise in consumer prices, given that UK consumer price inflation was 7.9% annually in June.

As the market sees it, the acceleration of wage inflation has increased the likelihood of more interest rates from the Bank of England, or that rates will reach a higher peak.

The pound crossed over the USD1.27 mark shortly after the reading. It was trading at USD1.2709 by midday Tuesday.

"There was always the likelihood that today's unemployment and wages numbers would give the Bank of England a headache when it comes to deciding what to do when it comes to further rate increases, and this morning's numbers have not just given the central bank a headache, but a migraine," said CMC Markets' Michael Hewson.

BoE Governor Andrew Bailey has previously warned of a wage-price spiral, though some commentators are not as convinced.

"While many people will decry the strength of these numbers and warn of the risk of wage/price spiral they rather miss the point that consumer incomes have been squeezed for months, with the gap finally narrowing, and now starting to work in consumer's favour," CMC's Hewson continued.

The trend is likely to continue, Hewson said, as consumer price inflation begins to come down and wage inflation slows.

"The BoE needs to remember that they've already raised rates 14 times in the last few months and there is still a lot more tightening that has yet to kick in," Hewson noted.

Hewson believes a further interest rate hike in September does seem "likely", though there is a case for a pause considering the respective trajectories of consumer price inflation and wage growth over the past five years.

"What today's data does mean beyond little doubt is that rates will need to stay at current levels for longer. More rate hikes aren't necessarily the solution to every problem. Just because every problem is a nail, doesn't mean you need a hammer. Just leave rates where they are for longer," he said.

AJ Bell investment director Russ Mould said the data adds up to a "very tricky situation" for the BoE, "which might only be further complicated by the CPI release tomorrow".

The wage data suggests inflation is becoming more entrenched in the economy, Mould notes. Accordingly, investors will have a close eye on core CPI to see if it provides further evidence of this.

ONS will release the latest CPI at 0700 BST on Wednesday. The annual figure is expected to cool to 6.8% in July from 7.9% in June. Core inflation is expected to edge lower to 6.8% from 6.9%.

By Elizabeth Winter, Alliance News senior markets reporter

Comments and questions to [email protected]

Copyright 2023 Alliance News Ltd. All Rights Reserved.