Signs rapid pay growth may be on the turn – EY ITEM Club comments

• The recent trend of a resilient – albeit loosening at the edges – jobs market continued at the turn of 2022 and 2023. A rise in employment was accompanied by another dip in inactivity, leaving the jobless rate unchanged at 3.7%, while vacancies fell again. But in a change from recent data, the EY ITEM Club also thinks there are signs that pay growth may be starting to ease. 

• Private sector regular pay growth, a measure often highlighted by the Monetary Policy committee, fell back, while underlying growth also dipped. There have also been other positive inflation developments, which mean the EY ITEM Club’s expects it is likely that the Bank of England will hold rates steady in next week’s meeting.   

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The labour market continued to demonstrate a degree of resilience around the turn of 2022 and 2023, despite a weak economy. Employment rose 65,000 in the three months to January, pushing the employment rate up 0.1ppts to 75.7%. This broadly offset a fall in economic inactivity in the same period, the fourth consecutive three-month decline. As a result, the Labour Force Survey jobless rate was unchanged at a low 3.7%. 

“However, job vacancies continued the fall which began last summer, reaching 1.1mn in the three months to February – 14% below last year's peak. Evidence of softer demand for workers and increased supply, as inactivity falls back, imply that inflationary pressure from the jobs market should ease – there were signs of this in the latest wages data. Meanwhile total pay rose 5.7% year-over-year in the three months to January, the least rapid increase since last July. Private sector regular pay growth, which the Monetary Policy Committee (MPC) has cited as an indicator of domestic inflationary pressure, slowed to 6.2% on a single-month basis, a seven-month low. The same measure on a three-month annualised basis (another indicator highlighted by the MPC) eased to the weakest in 12 months.  

“Whether less momentum in still-strong private sector pay growth and another fall in inactivity will, in themselves, provide the MPC with enough reassurance that the inflation outlook is improving is unclear. But these moves follow other developments, including an unexpectedly significant decline in the services sector inflation in January. Bringing these factors together, the EY ITEM Club thinks it’s now more likely that the Bank of England will keep interest rates unchanged in next week’s meeting, rather than the market expectation of a 25bps rise.”