Unemployment is up. The number of job vacancies is down. The rate of jobs growth is slowing and at a time when the number of people looking for work is rising. There are signs that the UK labour market is starting to slow.
These developments have to be put into perspective. They are straws in the wind rather than evidence that demand for jobs is about to collapse. And, crucially, the signs of a possible turning point will almost certainly not be conclusive enough to prevent the Bank of England from raising interest rates again next month.
That’s because pay pressure remains strong and much higher than the Bank considers compatible with meeting its 2% inflation target. Regular pay in the three months to May was 7.3% higher than in the same period a year earlier – the same as in the three months to April and the joint highest since modern records began.
Look closely enough and there are hints that earnings growth may have peaked. Looking at the single month of May rather than the quarterly figure, the annual rate of growth in regular pay slipped from 7.8% to 7.4%. As the Capital Economics analyst Ashley Webb points out, this is an indicator closely monitored by the Bank’s monetary policy committee.
There was a similar pattern for private sector wage growth, where the annual rate of increase picked up from 7.6% to 7.7% on a quarterly basis, but eased back in May alone from 8.1% to 7.4%.
For the interest-rate doves on the MPC, the latest pay data will be proof that the 13 successive increases in interest rates are working. They will argue that the labour market is a lagging indicator of the state of the economy, a better guide to what has happened in the past than a predictor of what will happen in the future.
There are reasons why the rate of pay growth may be slowing. Employment growth in the three months to May stood at just over 100,000, well down on the 250,000 increase in the three months to April. The unemployment rate rose from 3.8% to 4% because the growth in employment was less marked than the number of previously inactive people looking for work.
Will this evidence be enough to stay the MPC’s hand when it meets next month? Almost certainly not, given its fears about a wage-price spiral. But it should make it wary of overkill and force the financial markets to think again about whether interest rates will need to rise above 6%, as they currently expect.
