British wages rose faster than anticipated last month, in a move that economists judge may tip the Bank of England (BoE) towards a further rise in interest rates next month, despite an unexpected increase in joblessness too.
The Office for National Statistics said the unemployment rate edged up to 3.8 per cent - its highest since the second quarter of 2022 - rather than holding at 3.7 per cent, as forecast by economists in a Reuters poll.
Annual pay growth for the three months to January was revised up to 5.9 per cent and held at that level for the three months to February - above all forecasts in the Reuters poll, which had pointed to a drop to 5.1 per cent. Excluding bonuses, wage growth held at 6.6 per cent.
Sterling strengthened and government bond yields rose to a one-month high after the data, as financial markets saw a more than 80 per cent chance of the BoE raising interest rates to 4.5 per cent in May to help bring down inflation, which was above 10 per cent in February.
"For those of us expecting the Bank of England to keep interest rates unchanged next month, the latest surprise pick-up in UK wage growth undoubtedly puts a spanner in the works," said James Smith, economist at ING.
High inflation meant that in real terms, average earnings in the three months to February were 4.1 per cent lower than a year earlier, one of the biggest annual drops since ONS records started in 2001.
Discontent about pay has been especially high in the public sector, leading to widespread industrial action since late last year. Junior doctors are the latest group to strike, seeking a 35 per cent pay rise to compensate for below-inflation pay rises over more than a decade.
The BoE has said pay growth will be a key factor in its assessment of whether last year's surge in inflation to its highest in more than 40 years will create a lasting inflationary dynamic in Britain, which now has higher inflation than the United States or the eurozone.
Earlier this month, BoE Chief Economist Huw Pill said he saw signs that pay growth might be slowing, but that it was too early to say that the BoE's job was done on interest rates, which it has increased 11 times since December 2021.
However, Jack Kennedy, economist at recruitment website Indeed, said there were signs that the labour market was "coming off the boil".
Tuesday's ONS data showed a further fall in the number of job vacancies - though they remain 30 per cent higher than before the COVID-19 pandemic - and Kennedy said Indeed data showed fewer employers were offering bonuses to new starters than last year.
Economic inactivity dropped sharply over the quarter to its lowest since May 2022 at 21.1 per cent, due largely to a jump in the number of students seeking jobs. But long-term sickness in the working-age population - a major problem since the pandemic - rose to a record high in absolute terms.
Despite a hefty increase of 169,000 over the past three months in the number of people in work - more than three times the increase forecast in a Reuters poll - the total number of people in work remains slightly below pre-pandemic levels.
"Progress in the labour market is painfully slow," said Tony Wilson, director of the Institute for Employment Studies. "Three years on from the start of the pandemic, it's clearer than ever that we are being left behind by other major economies."
Employment minister Guy Opperman said the government would require unemployed people to spend more time with employment advisors and was providing extra training and childcare funding.
Meanwhile the sterling rose on Tuesday after data showed pay growth was higher than forecast, supporting investors' expectations that the Bank of England (BoE) will continue to hike rates in an effort to tame inflation.
Britain's unemployment rate rose unexpectedly 3.8 per cent in the three months to February - rather than holding at 3.7 per cent, as forecast by economists in a Reuters poll.
But pay growth for the three months to January was revised up to 5.9 per cent and held at that level for the three months to February - well above the forecast of 5.1 per cent in the Reuters poll. Excluding bonuses, wage growth held at 6.6 per cent.
Sterling rose 0.5 per cent against a weakening dollar to $1.2437. It edged up 0.05 per cent against the euro to 88.25 pence, after touching on Monday its lowest level against the single currency since March 23.
"While the unemployment rate ticked up modestly to 3.8... wage gains remain incredibly strong," said Dominic Bunning, Head of European FX Research at HSBC Bank.
"All this may see the BoE take a less dovish approach than other central banks in the G10, whose economies appear to be facing a more acute softening of economic momentum. Any signs of continuing economic divergence in the UK’s favour should result in a stronger GBP," he said.
British consumer price inflation hit its highest in more than 40 years at 11.1 per cent in October, and was still in double digits in February. The BoE expects inflation to fall below 4 per cent by the end of the year as wholesale energy prices fall but markets are still pricing in more hikes from the central bank.
Reuters