UK wage growth edges down as labour market eases

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UK wage growth slowed marginally in the three months to August, according to official data that will offer the Bank of England limited reassurance that pressures in the labour market are easing.

The Office for National Statistics said on Tuesday that average total pay was 8.1 per cent higher over the three-month period than a year earlier, down from a growth rate of 8.5 per cent the previous month, but still close to record highs. Regular pay growth, excluding bonuses, slowed from 7.9 per cent to 7.8 per cent.

With inflation at 6.7 per cent in August, pay has been growing faster than prices for several months, helping to bolster household finances against the impact of higher interest rates.

“Pay packets have staged a mini recovery this year,” said Hannah Slaughter, senior economist at the Resolution Foundation think-tank, but added: “With the labour market continuing to cool, the big question . . . is how long this will last.”

The ONS has delayed the release of key data on employment and labour force participation, which are usually published at the same time as the wage figures, because of problems with data collection.

However, the agency did publish figures for payrolled employment, which are drawn from HM Revenue & Customs records, as well as data on vacancies. These suggested hiring has continued to slow while the number of payrolled employees fell slightly over the summer. 

“Wage growth has passed its peak, but we suspect it will fall only gradually from here,” said Ashley Webb, an economist at the consultancy Capital Economics, which expected the BoE to hold interest rates at 5.25 per cent for most of next year to squeeze inflationary pressures out of the economy.

Policymakers are likely to want to see more convincing signs that the labour market has turned, and pay pressures eased, before they contemplate any easing in monetary policy.

Huw Pill, BoE chief economist, said at an online event on Monday that wage growth — as measured by a range of indicators — was running at a pace that was “not consistent with price stability”.

However, he also cast doubt on the accuracy of the ONS data, saying the official measure of wage growth increasingly looked like an “outlier” with other measures pointing to slower pay growth.  

Thomas Pugh, economist at the audit firm RSM UK, said slowing pay growth would allow the BoE to keep interest rates unchanged next month, rather than resuming rate rises. But he added that “an MPC which is less confident in the data may decide to err on the side of caution”.

The monetary policy committee still had “work to do” to bring inflation sustainably back to its 2 per cent target, Pill said on Monday, but added that if policymakers waited to see “the decline in inflation itself or the decline in wage growth itself”, they risked waiting too long and doing unnecessary damage to the economy.

Nonetheless, Pill said, he was not convinced that recent wage growth was supported by gains in productivity.

“Would I be happier if wage growth was 5 per cent rather than 8 per cent on the official measure? Yes, I would be happier. Would I be happier if wage growth was going down from 5 per cent? Yes, I probably would be because I am not an optimist about productivity at that horizon,” he said.