News & Analysis

Wage growth fell in August across all key measures in new data out this morning, providing some welcome though widely expected relief on Threadneedle Street.

Whilst today’s data is somewhat truncated given the ONS’ decision to push back much of the release until next week, wage data is now nonetheless showing the signs of cooling suggested by other labour market indicators. The headline average weekly earnings measure fell from 8.5% 3m/YoY growth rate in July, to 8.1% in August, a sharper decline than the 0.2pp fall that markets expected. As noted by the MPC in communications that accompanied the September policy decision, data on wages has increasingly looked out of kilter with other measures of pay and labour market strength that have begun to show signs of easing, a factor that saw policymakers reduce the emphasis placed on the release.

But given this, it was also widely expected that a slowdown in the official wages measure would ultimately materialise in this round of data, allowing policymakers to finally call a top in underlying inflation pressures.

Digging a little deeper, the slowdown in wage growth was notably not just limited to headline figures. Once stripping out bonuses, average weekly earnings growth fell from 7.9% 3m/YoY to 7.8%, in line with consensus projections. Granted this is not quite as dramatic as the fall in headline wage growth, but given that headline numbers have been distorted recently by a series of one-off cost of living payments, this should further help to reassure policymakers that the peak for wage growth has now passed. A similar trend is also playing out in private sector pay, which saw a 0.1pp fall from 8.1% 3m/YoY to 8.0%. Indeed, looking at single month figures, private sector regular pay growth has now fallen from a peak of 8.3% YoY in June to 7.8% in August. These falls bring the official measure of pay growth more in line with both the REC repost on jobs, and recent PMI release, both of which have suggested slowing rates of wage increases, a dynamic that should translate into slowing inflation over the coming data prints.

With earnings growth now falling in line with other labour market measures, any further rate hikes from the Bank of England now look highly unlikely, especially if this message is reinforced by evidence for a continued slowdown in price growth in tomorrow’s CPI release.

As such, we continue to expect the BoE to stick with its high for longer stance for an extended period of time, with the emphasis for markets increasingly turning to the UKs real rates profile and the timing of rate cuts in 2024. Given this, it is unsurprising that traders have continued to price out the prospect of further rate hikes from the BoE. Swap implied odds of November rate rise now lie at just 25%, with just over a 50% chance of any further rate rises being priced in, a move that has seen the pound slip three tenths against the dollar in early trading.

 

 

Author: 

Nick Rees, FX Market Analyst

 

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