Press release

14 Feb 2023

Still-strong pay growth will focus the Monetary Policy Committee's attention – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to the EY ITEM Club, reacts to the latest labour market statistics.

Related topics Growth
  • The jobs market sent mixed signals in the fourth quarter of 2022 on the extent to which it's loosening in the face of a weak economy. Employment rose, but inactivity fell, causing the jobless rate to tick up slightly to 3.7%. Job vacancies continued their downward trend, but private sector pay growth ran at a record high, outside the pandemic period.    

  • Granted, the latest Bank of England survey evidence suggests that wage inflation may have peaked. However, the latest numbers probably increase the odds of another rise in Bank Rate in March's Monetary Policy Committee (MPC) meeting.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “In some respects, the latest labour market numbers offered good news. Employment rose 74,000 in Q4 2022 on the previous quarter. This was the biggest gain since last summer, despite the economy flatlining. Inactivity – growth in which has stymied the economy's post-Covid recovery – dipped, adding to a modest decline since the autumn. These movements left the Labour Force Survey unemployment rate at 3.7%, up 0.1ppt from Q3 2022, but still close to a 40-year low. Pay growth remained strong, mitigating, if far from alleviating, the financial squeeze on workers from high inflation. Total average weekly earnings rose 5.9% year-on-year in Q4, similar to Q3's 6%.

“However, the latter risks stoking further inflationary pressures. The MPC will note that private sector regular pay growth, which it had expected to level off in the first half of this year, stood at 7.3% in Q4, a record high outside the pandemic period. Furthermore, while there were some signs of demand for workers continuing to wane (job vacancies fell further at the turn of 2022 and 2023 to the lowest since mid-2022), the labour market remained tight. Notably, the number of unemployed people was still only a little above the number of vacancies.

“The latest numbers mean the odds of the MPC going for one further rise in Bank Rate in March, before pausing, have likely increased. Granted, the jobs market is a lagging indicator, so could turn down more significantly in coming months. However, continued recruitment difficulties suggest employers may hold onto labour rather than cutting headcounts, and while recent Bank of England survey evidence suggests pay growth may have peaked, the MPC may want more reassurance from the hard data before it changes tack on policy.”