The wage squeeze is over

The latest monthly unemployment report for the UK contained good news. While the unemployment rate remained steady at 6%, employment rose by another 112,000 jobs in the three months to September and the level of job vacancies has almost returned to the pre-recession peak.

Average weekly earnings growth (excluding bonuses) increased to a three-month average annual rate of 1.3% in September, up from 0.9% in August. Wage growth has thus eclipsed inflation for the first time in five years.

The Bank of England’s latest quarterly Inflation Report struck a dovish tone, suggesting inflation could fall below 1% in the next few months and supporting markets’ expectation of a first interest-rate hike in the third quarter of 2015.

The central bank now expects the UK economy to grow by 3.5% this year, followed by 2.9% in 2015, down from a forecast 3.1% in August.

What the commentators said

For years now, the recovery has had no impact on people’s pay packets, leaving them worse off in inflation-adjusted terms. So it’s “a relief that we’re finally seeing real wage growth”, said Craig Erlam of Alpari UK. It appears employers are now being forced to up pay packets as opportunities in the job market increase and the number of qualified applicants dwindles.

In a consumer-driven economy – household spending accounts for around 60% of GDP – real wage growth “was always going to be essential” if the strong economic recovery is to endure.

However, eurozone woes and deflationary jitters are “dampening the growth trajectory and inflation expectations”, noted Regina Borromeo of fund manager Brandywine. And weak inflation, high debt levels and the ongoing fiscal squeeze all mean that once interest rates begin to rise in late 2015, they will rise only very slowly, said Capital Economics.

Even in two years’ time, the Bank of England base rate will have climbed by only 1.5% from its current record low of 0.5%, reckoned the consultancy.

Perhaps, said Guy Foster of Brewin Dolphin. But the doveish consensus notwithstanding, there’s a chance the data could force the Bank of England to tighten earlier.

“Nestled away” in the report is a chart showing that wage survey data point to a faster rebound in wages than official pay data imply. It may not be too long before the bank starts fretting about “falling behind the rate hike curve”.

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