UK wage growth defies forecasts but slows to lowest level in more than a year

Annual growth in regular earnings, excluding bonuses, was 6.2% in the three months to December, slowing from 6.7% in the prior three-month period. Although economists had forecast a 6% reading, this was the slowest growth seen since the third quarter of 2022. 

The annual pace of growth in total earnings, including bonuses, stood at 5.8% in the quarter, down from 6.7% in the three months to November.

When accounting inflation, annual growth in real terms rose 1.4% for total pay and 1.8% for regular pay compared to the same period in the previous year. UK inflation rose by 4% in the 12 months to December, up from 3.9% in November.

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“The recent trend lower in inflation, while good news, has largely been driven by a collapse in goods prices. The key watch item for the Bank lies in whether consumption reaccelerates as consumers find their feet,” said Hugh Gimber, global market strategist at JP Morgan Asset Management.

“This would be good for growth but would also present upside risks to inflation, particularly in services sectors where prices tend to be more closely linked to wages.”

As a result, with today’s print pointing to some signs of slowing in a still strong labour market, Gimber said “significantly more evidence” of cooling is likely required before the Bank of England is ready to consider cutting rates.

In the last quarter of the year, unemployment stood at 3.8%, surpassing expectations and decreasing from the 3.9% reported in the November period, according to the newly reinstated Labour Force Survey released today.

“The external market is on the lookout for signs that the BoE’s monetary policies are making headway against inflation, and we have those signs in this release,” said Lindsay James, investment strategist at Quilter Investors.

“Yet, one swallow does not make a summer and the risk remains that maintaining elevated interest rates could inadvertently apply undue strain on the economy and on the labour market, exacerbating economic challenges rather than alleviating them.”

Economists have advised against heavily relying on LFS data, citing persistent concerns about its quality. The LFS was suspended in October due to a declining response rate, and it is expected to take months before the issues are fully addressed.

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The Transformed Labour Force Survey (TLFS), which is intended to improve the reliability of the data, was scheduled to be released in March 2024, but the government said on 5 February this would now be delayed to September.

In an interview with the FT on Monday (12 February), Rob Kent-Smith, deputy head of the Office for Statistics Regulation (OSR), said that there was “a way to go” before official jobs statistics could be re-endorsed by the watchdog.

The absence of reliable labour market data poses a significant challenge for Bank of England policymakers, as they perceive wage pressures as a key risk factor that could sustain inflation above the target, potentially delaying a reduction in interest rates from the current 16-year-high of 5.25%.

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