UK pay growth lags further behind inflation, but jobless rate drops to 1975 lows

Signs displaying the price in pounds sterling of fruit and vegetables at a food stall in a street market in southeast London.
Signs displaying the price in pounds sterling of fruit and vegetables at a food stall in a street market in southeast London.PHOTO: AFP

LONDON (REUTERS) - British pay growth lagged further behind inflation in the three months to May, according to official data that may cause Bank of England officials to think twice about the need to raise interest rates.

The data also showed the unemployment rate in the period between March and May fell to its lowest since 1975 at 4.5 per cent, below the average forecast of 4.6 for Wednesday's figure in a Reuters poll of economists.

But the figures on wage growth showed the challenge facing Prime Minister Theresa May and her new government, with growing signs that households are feeling the strain of rising prices since last year's Brexit vote.

"Despite the strong jobs picture ... there has been another real-terms fall in total earnings, with the growth in weekly wages low and inflation still rising," said Matt Hughes, senior statistician at the Office for National Statistics.

Inflation hit an almost four-year high of 2.9 per cent in May, official data showed last month, a bigger increase than economists had expected.

The ONS said pay including bonuses, adjusted for inflation, fell 0.7 per cent in the three months to May - the sharpest drop since mid-2014.

In nominal terms, total earnings rose by an annual 1.8 per cent, the weakest increase since the three months to November 2014 and compared with 2.1 per cent in the period to April.

Excluding bonuses, earnings in nominal terms rose by 2.0 per cent year-on-year against expectations for a 1.9 per cent rise.

The Bank of England is watching wage growth closely as it gauges whether the increase in inflation is creating longer-lasting pressure on prices. It expects wages to rise by 2 per cent this year before picking up in 2018 and 2019.

Bank of England Deputy Governor Ben Broadbent said he was not yet ready to vote for higher interest rates, substantially lessening the chances there will be a rise in borrowing costs next month, according to an interview published on Wednesday.

The number of people in work rose by 175,000 in the three months to May, taking the employment rate to a record high of 74.9 per cent, the ONS said.

So far the central bank believes there is little pressure on most employers to raise pay sharply which could feed a more permanent inflation problem.

The ONS said the number of unemployment benefit claimants rose by 6,000 to 829,000 in June, picking slowing a little from May.

Economists taking part in the Reuters poll had expected the number of benefit claimants - which is considered to be a potential early warning sign of an economic downturn - to rise by 10,000.