UK wage growth remained strong in the three months to April, maintaining pressure on inflation and delaying hopes for an interest rate cut.
Official figures from the Office for National Statistics (ONS) showed that nominal weekly earnings, excluding bonuses, rose by 6% in the February-April period, in line with the previous period and slightly below expectations of 6.1%. Weekly earnings including bonuses remained steady at 5.9%, higher than the 5.7% expected by economists.
The strong wage growth follows a 10% rise in the national living wage for over-21 workers to £11.44 from 1 April. This is the first time in nearly a year that the headline earnings number has not fallen.
The unemployment rate for the same period rose from 4.3% to 4.4%, which is the highest since September 2021 and exceeds expectations of no change. This estimate is provisional due to low response rates to the ONS Labor Force Survey.
Strong wage growth figures are likely to delay the UK's first interest rate cut since 2020, with financial markets now anticipating a fall from 5.25% to 5% in September. Investors expect only two or three interest rate cuts this year, down from seven estimated at the start of 2024.
The Bank of England's Monetary Policy Committee is set to make its final decision next Thursday, the last before the general election on July 4. It is widely expected to keep interest rates unchanged for the tenth month in a row. Rob Wood, chief UK economist at Pantheon Macroeconomics, noted that a rate cut with wage growth near 6% would be unusual, suggesting the MPC may wait until September to cut rates.
Despite the strong earnings numbers, other labor market indicators are showing signs of slowing. The number of job openings fell by 12,000 to 904,000, continuing a nearly two-year decline. The overall employment rate fell to 74.3%, the lowest level in three years, and monthly payroll growth declined in April and May. The economic inactivity rate has risen to 22.3%, the highest level since 2015, increasing pressure to keep people in work. The number of people claiming benefits increased by 50,400 between March and April, the largest monthly increase since the pandemic.
Economists at Capital Economics expect the Monetary Policy Committee to vote to cut interest rates in August, provided other indicators such as wage settlements and next week's inflation data show progress. Forecasters expect headline consumer price inflation to fall from 2.3% to 2% in May, hitting the bank's target for the first time since 2021. However, inflation is expected to rise above 2% for most of the year after May.
Separate surveys, including a panel of bank policymakers, suggest companies are lowering their forecasts for next year's wage bill to around 4%. Economists believe that earnings growth needs to fall to 2-3% for inflation to decline and remain at the bank's target of 2%.
The Decision Foundation, a think tank, stressed that the next government will need to address the slowdown in the labor market and decline in employment rather than high price growth. Chief economist Nye Community noted that average earnings remain more than £14,000 a year below their pre-financial crisis trajectory after 16 years of stagnant wages.