UK wage growth beats forecasts but still lags inflation

LONDON (BLOOMBERG) - The squeeze on United Kingdom consumers continued in the second quarter, when the fastest inflation in four years ate into workers' income.

Basic wages rose an annual 2.1 per cent in the three months, lagging behind a currency-driven surge in price growth. That left real incomes down 0.5 per cent year-on-year, the Office for National Statistics said on Wednesday (Aug 16).

Wage growth has failed to sustainably pick up even with unemployment at the lowest in more than 40 years. However the latest data had some positive news for consumers, with employment continuing to rise and earnings stronger in the second quarter than economists had forecast. While the BOE expects the squeeze on UK pockets to continue for some months, it has said that inflation is near its peak and this may be as bad as it gets.

There were 125,000 jobs created in the three months and the unemployment rate fell to 4.4 per cent. That's the lowest since 1975 and below the Bank of England's equilibrium rate of 4.5 per cent.

In a further sign of labour-market tightness, which should be putting upward pressure on wage inflation, the number of unemployed people per vacancy was at a record low of 1.9.

The feeble wage figures are weighing on consumer confidence - at its lowest level in a year - and damping demand in British stores.

With consumer spending accounting for a large part of the economy, there've also been broader implications. Growth slowed in the first half of the year, and economists surveyed by Bloomberg see expansion slowing to 1.5 per cent this year from 1.8 per cent in 2016, and losing even more speed in 2018.

Total pay including bonuses rose 2.1 per cent, the ONS said, also better than forecast. Adjusted for inflation, it fell 0.5 per cent, slightly less than recorded the previous month.