UK Reaction: Strengthening pay growth could see BoE move by 50bps

• The LFS estimates for March to May 2022 showed the labour market remained tight – showing continued strength as employment rose by c. 300k and pay growth remains well above rates consistent with the Bank’s target.

• The strong rise in participation helped keep the unemployment rate at 3.8% in the three months to May (consensus 3.8%). Inactivity fell by 0.4ppts over the quarter (to 21.3). We expect to see further falls in inactivity reduce pressure in labour market over the coming quarters.

• Average earnings (ex bonuses) rose slightly to 4.3% in the three months to May, but the single month figure for May has picked up to 0.6% m/m to 4.6% following a 0.5% rise in April.

• We now expect the MPC to hike rates by 50bps in August, with the continued strength of the labour market and wages shifting our view.

The Labour Force Survey (LFS) estimates for March to May 2022 showed the labour market remained tight – showing continued strength as employment rose by c. 300k and pay growth remains well above rates consistent with the Bank of England’s (BOE) target. The three month unemployment rate held steady at 3.8%, in line with consensus expectations. Employment as measured by the LFS rose 296k over the quarter well above consensus estimates of a 170k rise. The employment rate rose to 75.9, up 0.4ppts over the quarter. A stronger than expected rebound in inactivity contributed to the rise, with inactivity falling by 0.4ppts (to 21.1) over the three months to May 2022. Despite this inactivity remains 0.9ppts higher than where it was prior to the pandemic in Dec-Feb 2020.

Average earnings (ex bonuses) rose slightly to 4.3% in the 3 months to May, but the single month figure for May has picked up to 0.6% m/m to 4.6%. Total pay (including bonuses) growth over the quarter slowed to 6.2%, surprising to the downside and it is likely to fall further once large-off payments recorded in March drop out of the average.  Despite some moderation in bonus pay, the continued strength of wages growth is likely to add to the Monetary Policy Committee’s (MPC) worries of more persistent inflation. 

The more-timely HMRC estimates of payrolled employees appears to have cooled – June 2022 posted a moderate 31k rise on the heavily revised May figure (revised down to 31k from 90k), to a record 29.6 million. This rate comes in much closer to the pre-pandemic average of c.20k and reflects signs of moderating employment growth highlighted in recent survey data. This can also be seen in vacancies which rose over the quarter to 1.2m, with the rate of growth in vacancies continuing to slow down.

The UK labour market remains tight and pay has continued to edge higher – a development which we think will trouble the MPC. This print suggests the gradual easing of the pressure in the labour market has begun, but only just. The pickup in labour market participation is helping to moderate, but vacancies remain at all-time highs as demand for labour remains robust though beginning to level off. We expect to see a gradual easing of labour market tightness continue over the coming quarters as more of those who exited the workforce during the pandemic re-enter. On balance, we now expect the MPC to hike rates in August by 50bps. The strength of today’s labour market data and elevated wage growth when taken alongside recent communication from MPC members Governor Andrew Bailey and Chief Economist Huw Pill, who have signalled they will consider a 50bp move, and BoE’s latest Decision Maker panel suggesting that firms expect inflation to remain above target three-years from now, has shifted our view.  

Financial markets reacted little to today’s print. Sterling rose by 0.3% against the dollar following the release.