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Wage growth in the UK has remained strong in the three months to April, maintaining pressure on inflation and delaying hopes for an interest rate cut.
Official figures from the Office for National Statistics (ONS) showed nominal weekly earnings, excluding bonuses, rose by 6% from February to April, consistent with the previous period and slightly below the 6.1% forecast. Weekly earnings including bonuses held firm at 5.9%, above the 5.7% expected by economists.
The robust wage growth follows the 10% increase in the national living wage for workers over 21 to £11.44 from 1 April. This marks the first time in nearly a year that the headline earnings figure has not fallen.
The unemployment rate for the same period increased from 4.3% to 4.4%, the highest since September 2021 and above forecasts of no change. This estimate is provisional due to lower response rates to the ONS workforce survey.
The strong wage growth figures are likely to delay the UK’s first interest rate cut since 2020, with financial markets now anticipating a reduction from 5.25% to 5% in September. Investors are expecting only two or three rate cuts this year, down from seven estimated at the start of 2024.
The Bank of England’s Monetary Policy Committee (MPC) is set to make its latest decision next Thursday, its last before the 4 July general election. It is widely expected to keep interest rates unchanged for the tenth consecutive month. Rob Wood, chief UK economist at Pantheon Macroeconomics, noted that cutting rates with wage growth close to 6% would be unusual, suggesting that the MPC may wait until September to cut rates.
Despite the robust earnings figures, other labour market indicators show signs of slowing. The number of vacancies decreased by 12,000 to 904,000, continuing nearly two years of declines. The overall employment rate fell to 74.3%, a three-year low, and monthly payroll growth declined in April and May. The economic inactivity rate rose to 22.3%, the highest since 2015, adding pressure to keep people in work. Benefit claimants increased by 50,400 between March and April, the largest monthly rise since the pandemic.
Economists at Capital Economics predict that the MPC will vote for a rate cut in August, provided other indicators such as pay settlements and next week’s inflation data show progress. Forecasters expect headline consumer price inflation to have dropped from 2.3% to 2% in May, hitting the Bank’s target for the first time since 2021. However, inflation is expected to rise above 2% for most of the year after May.
Separate surveys, including the Bank’s decision-makers’ panel, indicate that companies are reducing their wage bill forecasts for the coming year to about 4%. Economists believe earnings growth needs to drop to 2-3% for inflation to decline and stay at the Bank’s 2% target.
The Resolution Foundation, a think-tank, highlighted that the next government will need to address a slowing labour market and falling employment rather than high price growth. Principal economist Nye Cominetti noted that average earnings remain more than £14,000 a year below their pre-financial crisis path after 16 years of wage stagnation.
