British pay growth slowed to its lowest pace in nearly two years, according to official figures released on Tuesday. Average weekly earnings, excluding bonuses, increased by 5.4% in the three months to June, down from 5.8% in the previous three months. This slowdown in wage growth has likely eased inflation pressures, providing some reassurance to the Bank of England. The surprise drop in the unemployment rate from 4.4% to 4.2%, the lowest since February, also defied expectations of a rise, indicating positive job market conditions.
The data led to an immediate strengthening of the Sterling against the U.S. dollar, suggesting a positive market response. The Bank of England, which recently cut interest rates, is closely monitoring wage growth and inflation levels. There is speculation of a potential rate cut in September, as pay continues to grow at a rate higher than what is considered sustainable for maintaining the 2% inflation target. The upcoming inflation data is expected to show the rate back above target, raising concerns about a need for further monetary policy adjustments.
Despite the slow wage growth, there was an unexpected increase in the number of people employed by 97,000, surpassing economists’ forecasts. This suggests a stronger labor market than anticipated. However, concerns remain about the accuracy of unemployment data, with some experts suggesting that the Office for National Statistics may have undercounted the number of people in work. The Resolution Foundation think tank has raised concerns about the underestimation of employment figures.
Employers are expecting lower inflation to alleviate wage pressures, with the expectation of a 3% pay rise, the lowest in two years. The Bank of England is focusing on private-sector pay, which is forecasted to slow down to 5% in late 2024 and 3% in late 2025. Growth in regular private sector pay slowed to 5.2% in the three months to June, the lowest since May 2022. Adjusted for inflation, workers are experiencing a real pay increase, with real pay excluding bonuses rising by 3.2% annually, the joint-largest increase since mid-2021.
Labour shortages and unfilled job vacancies are also contributing to inflation pressures. Vacancies fell to a three-year low in the three months to July, with certain sectors finding it challenging to fill positions. The government aims to increase labor force participation to 80%, aligning with countries like the Netherlands, Switzerland, and New Zealand. The new finance minister, Rachel Reeves, highlighted the importance of getting more people into work and hinted at upcoming decisions on spending, welfare, and tax in the upcoming budget to be announced on September 30.
