- Data showed that the labour market is continuing to loosen – with the inactivity rate and vacancies falling, while employment growth is driven by part-time and self-employment.
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- Data showed that the labour market is continuing to loosen. The inactivity rate and vacancies are falling, while employment growth is driven by part-time and self-employment.
- Current wage growth remains a strong risk, though. While it remains high, the Bank of England (BoE) will struggle to take comfort from the loosening labour market.
- Data shows inflation pressures remain persistent, particularly in the core reading. While services inflation remains below MPR forecasts, its recent trajectory and high wage growth limit positive takeaways.
- Current data suggests the BoE will hike again in May (likely 25bp) and again in June.
Mixed Labour Data: Falling Tightness, Strong Wage Growth
Signs of Loosening Labour Market
UK IFO unemployment rose to 3.8% in February, in line with the MPC’s February MPR projections and above what they set out at the last policy meeting (Chart 1). This was driven by a rise in unemployment and a fall in inactivity. And while headline 3MMA growth in employment was large (+169k in February), the details show that part-time and self-employment increasingly drive employment growth (Chart 2).
Meanwhile, declines in vacancies (-47k QoQ) continue. The ratio of unemployed to vacancies rose to 1.2x – a historically low level but the highest rate since October 2021 (Chart 3). The rise in vacancies since COVID (+304k) continues to be driven by industries with lower wages, including human health and social work (+64k) plus hotels and restaurants (+50k).
Together, the data depicts reducing labour market tightness and reduced feedthrough into future aggregate wage growth.
Wage Growth Remains Stubbornly High
Despite the loosening labour market, wage growth remains strong, particularly for the private sector. Regular pay growth (3MMA) remained unchanged at +6.8% YoY, while total pay growth remained at +5.9% (Chart 4).
The detail was even starker in private employment – where YoY regular pay growth jumped back to +7.3% having previously looked like it was trending lower (Chart 5). The reduction in the more timely PAYE wage data for March does little to offset this concerning picture – given that it is consistently subject to large revisions (Chart 4).
Strong Core Inflation Supports More Tightening
March’s inflation release compounds concerns from February’s release – namely that inflation would be far more persistent than hoped. March headline inflation at +10.1% YoY was 0.3pp lower than in February because of lower petrol prices but higher than expected. This brings it about in line with February’s MPR (Chart 6).
Meanwhile, core and services YoY inflation remained unchanged (at +6.2% and 6.6%, respectively). While this keeps services inflation below MPR forecasts, the recent trend is hardly reassuring for doves, particularly while wage growth remains high (Chart 7).
BoE Now Looking Likely to Hike in May and June
February’s inflation print, just before the MPC’s last meeting (which showed a strong rise in headline and core inflation), laid the path for the cautious hawkishness in the policy decision. March’s inflation data is less concerning. But, coming alongside strong wage growth, it will make a dovish pivot for the BoE harder to navigate.
MPC member comments since their last meeting have been relatively more hawkish, with increased concern from the more neutral internal members apparent. Meanwhile, their comments on the risk of tightening credit conditions following last month’s banking-sector volatility remain relatively calm.
This week’s data will probably keep the hawkish concern alive. As I have long expected, the labour market looks to be loosening up well (particularly considering the sectors in which vacancies lie, and the composition of employment growth). However, contemporary private sector wage growth is a fly in the ointment. While growth there remains high and stable, the BoE will struggle to be comfortable that services inflation will return to more typical levels.
Chief Economist Pill and outgoing (in July) arch-dove Tenreyro keep touting the long lags of policy effects. But given the recent data, the lean will probably be to continue to hike cautiously until more dovish Q2 data has fully been digested.
On that basis, my base case has shifted to a 25bp hike in May and another in June. This is roughly in line with near-term market pricing (Chart 10).
Risks to this view include any signs that banks have tightened credit conditions or any serious global market volatility (Ukraine’s spring offensive, and the Turkish election are two near-term risks). Meanwhile, there is little other UK data likely to significantly impact the May decision, which, with the release of the MPR, should also set the path for tightening in June.