MacroScope

Key to UK interest rate hike, pay data, still a muddle

July 8, 2014

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Bank of England rate setters meeting this week should be in cordial agreement that Britain’s economy is growing at a decent pace, and that price pressures look mostly in check at the moment.

But when it comes to gauging how quickly slack in the labour market is disappearing – a key question deciding when they should raise interest rates – the surveys look a lot less joined-up.

Two reports on Tuesday were far apart on the issue and underscore just how tough it is to get a grip on one a threat in any economy to future inflation – the pass-through effects from higher wage deals, which tend to feed upon each other.

One from the Recruitment and Employment Confederation and KPMG showed British firms upped salary offers for new permanent staff at the fastest rate in almost 17 years as the pool of suitable candidates dwindles rapidly.

And the availability of permanent staff fell at the fastest rate since the survey started in 1997, with demand rising for both temporary and permanent staff.

The UK purchasing managers indexes last week showed the pace of hiring at services companies – which comprise the bulk of the economy – hit the highest level last month since records began in 1996.

Taken together, they paint a fairly unambiguous picture that spare capacity in the labour market is disappearing fast.

But the latest comprehensive quarterly survey of almost 7,000 companies from the British Chambers of Commerce (BCC) suggested otherwise.

Fewer manufacturing and services companies said pay settlements were fuelling price pressures in the second quarter compared with the first three months of the year.

And difficulties hiring staff eased last quarter for services companies, which range from major banks to high street restaurants.

The BCC said the percentage of services companies trying to hire full-time staff fell to just 57 percent, the lowest share since its data series started in 1997.

But the share trying to recruit part-time staff rose to 40 percent – the highest on record.

Figures under the BoE’s scrutiny include people working part-time who want full-time work, so the BCC survey would seem to chime with BoE Governor Mark Carney’s comments two weeks ago that there may be more slack in the labour market than previously thought.

Official data has shown weak annual wage growth, which fell to just 0.9 percent in April, although partly due to tax changes last year. But even first quarter age growth of 1.9 percent barely matched inflation in the same period. And it’s a similar picture in the United States.

Britain’s economy is motoring, but until the morass of labour market data becomes something more coherent, BoE policymakers will be scratching their heads at at least a few more meetings yet before deciding to raise interest rates.

Chart by @ReutersFlasseur

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