UK labour market data points to persistent inflationary pressure

(Alliance News) - The UK employment rate remained steady in the final three months of 2022, according to data from the Office of National Statistics on Tuesday, but an up-tick in annual wage growth is a cause for concern for many analysts.

The unemployment rate was 3.7% in the UK in the three months from October to December, unchanged from the September to November period. The jobless rate was in line with market consensus cited by FXStreet.

The ONS said that growth in total and regular pay fell in real terms annually in October to December, by 3.1% for total pay and 2.5% for regular pay, when adjusted for inflation.

This is smaller than the record fall in real total pay in February to April 2009 of 4.5%, the ONS noted, but still remained among the largest falls in growth since comparable records began in 2001.

However, annual growth in average total pay, including bonuses, was 5.9%. Excluding bonuses, it was 6.7%. In September to November, annual growth in average total pay, including bonuses, and in regular pay, excluding bonuses, both were 6.4%.

Lloyds Bank said Tuesday's report showed conditions in the UK labour market were still tight enough to concern the Bank of England that domestic inflationary pressures may not be easing enough to allow for inflation to fall back to its 2.0% target.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, explained that, "crucially", the annualised rate of three-month-on-three-month growth in private-sector wages excluding bonuses declined to 6.9% in December from 7.5% in November.

This, he said, was a rate specifically highlighted by the Monetary Policy Committee in the BoE's February meeting minutes because it "matters most of all for the inflation outlook".

Despite the slight slowdown, Tombs argued that wage growth is still is "far too high for the MPC to tolerate long-term", though he acknowledged it should slow further, as "labour market slack builds, job-to-job flows decline, and CPI inflation and inflation expectations continue to fall."

Daniel Mahoney, UK economist at Handelsbanken, agreed, explaining that while there are some "tentative" signs of the labour market loosening, a "majority" of MPC members may conclude that high nominal wage pressures justify a further increase in interest rates by 25 basis points at the Bank of England's next meeting in March.

At its last meeting in February, the Bank of England lifted interest rates by 50 basis points, taking the benchmark bank rate to 4.00% from 3.50%.

"Tomorrow's inflation figures will give a further indication as to how the BoE will act at the March meeting," Mahoney added.

The UK will publish its consumer price index reading at 0700 GMT on Wednesday. Markets are expecting the annual inflation rate to fall to 10.2% in January from 10.5% in December.

For analysts at Davy Research, should UK inflation fall back as expected, markets will be "far more likely to fully price in two more 25 basis point hikes from the Bank of England at both the March and May policy meetings".

By Heather Rydings, Alliance News senior economics reporter

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