UK wage growth beats forecasts

LONDONThe squeeze on UK consumers continued in the second-quarter, when the fastest inflation in four years ate into workers’ income.

Basic wages rose an annual 2.1% in the three months, lagging behind a surge in price growth driven by the pound’s decline in the wake of the Brexit vote. That left real incomes down 0.5% year-on-year, the Office for National Statistics said yesterday.

While households are still being pinched, the unexpected acceleration in wage growth and drop in unemployment pushed the pound higher. The currency climbed from the weakest level since October against the euro, and investors moved forward their expectations for a Bank of England (BoE) rate hike by the end of 2018 to 89%, from 80% on Tuesday, according to short sterling.

Still, it’s a headache for BoE policymakers that wage growth has failed to sustainably pick up even with unemployment at the lowest in more than 40 years. Officials cut their forecasts for pay growth at this month’s Inflation Report, with governor Mark Carney suggesting that “an element of Brexit uncertainty” was preventing firms from awarding bigger wage increases.

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. For now, the feeble pay growth is 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 are broader implications. Growth slowed in the first-half of the year, and economists surveyed by Bloomberg see expansion cooling to 1.5% this year from 1.8% in 2016, and losing even more speed in 2018.

Even with the weaker growth outlook, the lowest unemployment rate since 1975 should be driving up wages. There were 125,000 jobs created in the three months and the unemployment rate fell to 4.4%, the report said. That’s below the BoE’s equilibrium rate of 4.5%. — Bloomberg