U.K. wage growth hits six-year high as labour market tightens

Total pay growth quickened to 2.9 per cent. The jobless rate fell to 5.5 per cent, matching the lowest since 2008, from 5.6 per cent in the second quarter.
Total pay growth quickened to 2.9 per cent. The jobless rate fell to 5.5 per cent, matching the lowest since 2008, from 5.6 per cent in the second quarter.PHOTO: REUTERS

LONDON (BLOOMBERG) - U.K. wages grew at their fastest pace in more than six years and the unemployment rate unexpectedly fell, suggesting inflationary pressures are building in the labour market.

Pay excluding bonuses increased an annual 2.9 per cent in the three months through July, the most since early 2009, the Office for National Statistics said Wednesday in London. Total pay growth also quickened to 2.9 per cent. The jobless rate fell to 5.5 per cent, matching the lowest since 2008, from 5.6 per cent in the second quarter.

With companies having to raise wages to attract workers, spare capacity in the labour market is a key metric for the Bank of England as officials consider when to end more than six years of record-low borrowing costs.

For now, falling oil prices are suppressing inflation, leading economists to expect the BOE will keep the benchmark rate at 0.5 per cent until early next year.

The pound climbed after the release of the data and was 0.3 per cent higher at US$1.5383 (S$2.1570) at 9:34 a.m. London time (4.34 pm Singapore time). It strengthened 0.5 per cent to 73.12 pence per euro.

Ten consecutive quarters of growth has left unemployment in Britain at its lowest for seven years, with only the U.S. and Japan boasting lower rates among Group of Seven countries. The jobless rate in the euro region is 10.9 per cent.

The number of people in work rose 42,000 to 31.1 million in the latest three months. There were some signs of softening, with unemployment increasing 10,000 to 1.82 million, while claims for jobless benefits rose 1,200 in August from July. The rate stayed at 2.3 per cent.

With inflation around zero for most of this year, U.K. households are enjoying the first period of sustained real wage growth since the financial crisis. Adjusted for price changes, wages grew 2.9 per cent in the latest three months, the strongest since 2002.

Total pay was bolstered by bonuses which grew 17 per cent in July and 3.8 per cent in the three months through July. The ONS said this was due to higher bonuses in financial and business services. Excluding bonuses, pay growth in the private sector quickened to 3.4 per cent in the three month period.

There were signs the jobless rate could fall further in the three months through August. Single month figures show unemployment was 5.4 per cent in July, the lowest since 2008, and 5.5 per cent in June.

The figures come as Federal Reserve policy makers gather this week, with economists divided over whether they will raise U.S. interest rates for the first time in almost a decade. A decision to do so could put pressure on their British counterparts to follow suit.

BOE officials see spare capacity in the U.K. economy being eliminated over the next year, and economists surveyed by Bloomberg predict a quarter-point rate increase in the first quarter.