UK pay finally on the rise?

June 17, 2015

We’ve been told for years that a meaningful pickup in wages – usually the primary driver of domestic inflation – was required to set the stage for interest rate hikes both in the UK and the U.S.

Now pay is starting to get interesting.

After many months of very tame wage rises and literally a year’s worth of downgrades to official pay growth expectations by the Bank of England, both total pay including bonuses and ex-bonuses easily beat expectations in the latest Reuters poll of economists.

Not a single forecaster got the headline figure right and only one of 29 managed to call ex-bonus pay growth spot on.

This turn in the UK data comes just as inflation is practically zero, which makes it the best rate of real growth – in other words putting the most amount of money in consumers’ pockets – since 2007, before the financial crisis. Some are now saying that a Bank of England interest rate rise, pretty much banished until March next year at the earliest, may come back into the spotlight.

It also comes at a crucial time also for the U.S., where the Federal Reserve is about to lay more groundwork for its first interest rate rise in nearly a decade, most likely in September or even possibly before.

Wage inflation downgradesThe Bank of England cut its pay growth forecast to 2.5 percent this year from 3.5 percent previously, which is now looking like a bit of a faux pas. But its forecast for next year is starting to look better.

“There are clearly signs of wages starting to pick up and we should be able to hit 3% around the end of the year,” wrote Alan Clarke, head of European fixed income strategy at Scotiabank. “Overall, the wage inflation data were previously an obstruction to a rate hike, but they aren’t any more.”

The chart below shows a clear move upward.

UK pay April


On top of that, it seems fairly clear that for most of the past year, economists have been underestimating the rise in pay.

UK pay April











For a bunch who have been widely criticised since the financial crisis for being overoptimistic about inflation picking up and bond yields rising, this should at very least suggest something may be afoot.

Minutes to the MPC’s latest meeting, published alongside the latest wage data but from a meeting that took place before they were available, suggested optimism was already brewing.

The latest LFS micro-data had indicated that shifts in the composition of employment towards those with shorter tenure, fewer qualifications and employed in occupations typically attracting lower pay levels might be subtracting about 0.8 percentage points from average pay growth. Abstracting from these factors, therefore, it was possible that underlying private sector pay had been increasing at an annual rate of around 3½%. Additionally, there were signs of a recovery in job market dynamism and confidence on the part of employees from the fact that job-to-job flows, or labour-market ‘churn’, had returned almost to pre-crisis levels. Voluntary resignation rates had also increased – although so far only to a level lower than pre-recession norms.

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