- A pickup in headline UK pay growth to a 21-month high in the latest data will reinforce the Monetary Policy Committee's (MPC) concerns about inflation persistence. Private sector pay growth also increased and remained well above the Bank of England forecast.
- While a surprise rise in unemployment points to a looser jobs market, the latest pay numbers are consistent with the MPC going for another rate rise in its next meeting in August. And short of clear evidence emerging that wage growth is cooling, an August rise may not be the last.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Headline (three-month average of the annual rate) total earnings growth increased to 6.9% in May, a 21-month high. Private sector regular pay rose 7.7% on the same basis, a record high outside the pandemic period and running well ahead of the Bank of England's forecast for growth of 6.3% in Q2. The pressure on the MPC to continue increasing rates in August will be intense.
“The latest data for the labour market did at least offer signs of loosening on the quantities side. Employment continued to rise, increasing by 102,000 in the three months to May on the previous three-month period. But inactivity fell back, contributing to the workforce growing 1.1% year-on-year in the three months to May. This took the economically active population virtually back to its pre-Covid size. The net effect of more people in work, but a bigger workforce, was to push the Labour Force Survey jobless rate up to 4%, from 3.8% previously.
“Over time, the EY ITEM Club thinks pay growth should slow, as declining inflation expectations and an increase in the supply of labour relative to demand have an effect. But it's likely to be a while until pay growth slows to a level that's consistent with the 2% inflation target. The latest numbers support the EY ITEM Club’s view that the MPC will go for another rate rise in its next meeting in August, followed by a further increase in September.”