By Tomasz Wieladek, chief European economist at T. Rowe Price
AWE wage inflation rose from 8.2% in June to 8.5% in July – a record high in the series. While consensus expected the number to stay flat at 8.2%, the ONS specifically pointed out the rise was the result of one-off payments to the NHS and the civil service.
However, year-on-year private sector wage growth has declined marginally from 8.3% in June to 7.9% in July. Month-on-month seasonally adjusted private wage growth has declined from 1.1% in May and 0.4% in June, to 0.2% in July. The marginal decline in year-on-year private sector wage inflation, together with the decline in monthly momentum, will give the BoE some hope the predictions of the KPMG-REC survey – that wage pressures will moderate – are finally coming to pass. However, this also happened in February. The ONS figures for February suggested wage momentum – the month-on-month growth rate – had fallen to zero, but this was subsequently revised up significantly. These preliminary data need to be interpreted carefully because future revisions can be large.
On the quantity side, the labour market continued to loosen. The unemployment rate went up to 4.3% in August and the vacancies to unemployment ratio continued to fall. This is evidence the Bank of England’s tight monetary policy is finally beginning to take the heat out of the labour market.
Based on the data today, I believe the Bank of England will continue to hike this month. Wage inflation is significantly overshooting the Bank of England’s forecasts, so it is very likely to raise rates again next week.
