BoE happy to leave labour market running hot

16th September 2015 By: Ranko Berich

UK Employment Data – 16/09/15

Wages are rising in the UK at the moment, which is good news for the consumer and great news for the economy. However, until there is a stronger sign that higher wages are affecting inflation, the Bank of England will be happy to leave the labour market running hot.

Under normal circumstances, a rapid spike in wages would cause the Bank of England to get nervous that slack is running out in the labour market. This would lead employers to start passing increased labour costs onto consumers, creating an inflationary spiral.

The Bank of England will be hoping that increases in productivity will mean that higher wages won’t result in higher unit labour costs for producers, as businesses will be getting more output per hour of work. If so, strong wage growth is less likely to filter through to inflation and the Bank will be happy to leave rates where they are until prices or unit labour costs start to pick up.