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Bank of England worried as real earnings surge

  • Real earnings growth peaks, causing concern at Bank of England
  • Office for National Statistics reports slight decrease in regular salary
  • Labour market shows signs of moderation, worrying economists

Although the wage figures appear to be positive for households, the Bank of England may continue to anticipate stubbornly high core wage growth.

According to the most recent official data, real earnings growth, including inflation, has reached its greatest level in nearly two and a half years due to a slower deceleration in wage increases than initially anticipated.

According to the Office for National Statistics (ONS), the mean regular salary, exclusive of bonuses, decreased by 6% year-over-year in the three months leading up to February.

The report states that when the rate of inflation is accounted for, real pay growth by the same metric increased to 2.4%, the highest level since July 2021.

The base figure deviated marginally from the 6.1% recorded the previous month and surpassed the 5.8% forecast by economists.

The data about bonuses throughout the same continuous three-month period remained unchanged.

Although the numbers may appear to be positive for economically challenged households, they may cause concern at the Bank of England, which is currently evaluating whether to implement a long-awaited reduction in interest rates to combat inflation.

It has desired a substantial deceleration in wage growth out of concern that excessive earnings could incite inflationary pressures on demand and, consequently, prices throughout the economy.

The broader ONS data revealed that the unemployment rate in the United Kingdom increased from 3.9% to 4.2%, although the statistics agency maintained a severe health warning on the figure as it continued to improve the reliability of employment data.

Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), stated: “Continuing at a decelerated rate, recent trends of declining vacancy rates and sluggish earnings growth have persisted this month.

“However, in tandem with a deceleration in inflation, there has been a surge in real earnings growth, which has reached its highest level in almost twenty-five months.”

Concurrently, there are preliminary indications that the labour market is beginning to moderate, as both the headline employment rate and the total number of individuals on payrolls have declined, according to data from HMRC and our surveys, respectively.

As a result of the Bank’s interest rate increases implemented since December 2021 to combat inflation, both businesses and consumers are now saddled with higher borrowing costs, which exacerbates the financial strain caused by the very cost of living crisis that the Bank is attempting to eradicate.

It is anticipated that the most recent inflation figures, which are scheduled for release on Wednesday, will additionally demonstrate the Bank’s continued advancement towards its objectives and potentially indicate the possibility of a reduction in interest rates from the present level of 5.25%.

According to economists surveyed by Reuters, the annual growth rate of the consumer price index (CPI), a measure of inflation, decelerated to 3.1% in March.

This is a decrease from the present 3.4%.

It is widely anticipated that energy price fluctuations will cause the CPI to fall below the Bank’s 2% target shortly thereafter. However, policymakers have expressed concern that components of inflation may rise again later in the year.

The financial markets and economists are divided regarding the optimal timing for a potential rate reduction for this reason.

Others predict the Bank will delay its decision until August while it monitors so-called upside risks, such as crude price spikes caused by instability in the Middle East.

A shift in wagers away from June was indicated by LSEG platform data following the release of ONS data.

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The effort by the Bank of England to curb price inflation was the primary cause of the economy entering a recession in the latter part of the previous year.

Since then, data has indicated a resurgence to modest growth.

Regarding the crucial pay data, Capital Economics’ chief UK economist, Paul Dales, remarked, “Weaker activity indicates that wage growth will soon decelerate even more drastically.

The labour market’s more pronounced contraction than anticipated in February implies that wage growth will persistently decelerate in the coming half-year, despite the apparent abatement in the rate of decline.

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