Labour market data creates headache for Bank of England

20th January 2016 By: Ranko Berich

Labour market data – 20/1/16

The Bank of England’s job just keeps getting harder. Although more people are in work, the labour market is stubbornly refusing to generate any of the upwards price pressure the Bank is so desperately seeking.

The Bank has clearly signalled on multiple occasions that it expected wage growth to slow down, and was again proven right today. There are a number of factors at play, including compositional effects due to more lower-skilled workers, slower economic output growth, and, worst of all, the low level of inflation feeding into pay negotiations. As a result, it’s difficult to say with any confidence when inflation will finally begin to pick up in earnest, so as Mark Carney pointed out yesterday, it’s an easy decision to keep rates unchanged.

Despite similar unemployment levels, the current labour market situation in the US and UK is significantly different. In the US, solid increases in unit labour costs have prompted the Fed to embark on a tightening cycle. With the BoE nowhere near reaching this level of certainty, policy expectations in the US and UK are diverging, which has sent the pound reeling. This is likely to continue until wage and employment data gives a clear signal and commodity prices bottom out, and with a Brexit referendum looming things are looking increasingly dire for sterling.