Labour Market: Mixed signals, but August rate cut still on

20 June 2024

The labour market data continues to send mixed signals to the Monetary Policy Committee (MPC). On the one hand, a 139,000 drop in employment in April was enough to push the unemployment rate up to 4.4%. Even if we take the official employment data with a big pinch of salt, it is clear that the labour market is easing. On the other hand, wage growth remains hot with total pay growth sticking at 5.9%, almost double the 3% that the MPC thinks is consistent with 2% inflation. 

However, a big chunk of the pay growth strength is due to the one-off 9.7% rise in the National Minimum Wage (NMW). With inflation soon to be back at the 2% target, the labour market clearly easing and wage growth set to slow in the second half of the year, an August rate cut looks promising. 

Something for everyone 

The first thing to say is that we should not take the Labour Force Survey (LFS) figures too seriously in isolation, showing a sharp employment fall and unemployment rise, because sampling problems continue to make the official labour market data less reliable than normal. The jump in the unemployment rate from 3.8% at the end of last year to 4.4% now looks too big compared with other survey data. 

That said, it is clear that the labour market is easing. Payroll employment growth has taken a step down this year to an average 3k month-on-month (m/m) fall, compared to a 35k average gain in the three months to December. And vacancies also fell to 904k in the three months to May, from 908k in the three months to April.

However, the hawks on the committee will be able to point to hot wage growth. Private sector regular pay growth, which is the measure most indicative of pay pressures in the real economy, was 5.8% in April. To put that into context, the MPC estimates that pay growth of around 3% is consistent with 2% inflation. 

However, the large increase in the minimum wage is clouding the picture. Indeed, the NMW rise was probably responsible for half of the 0.7% m/m rise in private sector regular wage growth in April. May will also see a boost from the minimum wage, as pay rises by employers whose reference period starts in late April filter into the data.

Wage growth will start to slow later in the summer as the boost from the NMW starts to fade. 

The policy outlook 

The MPC will find it hard to justify a rate cut while wage growth is close to 6.0%, and given the MPC meeting next week is only a few weeks before the election there is virtually no chance of a June rate cut.

Admittedly, an August rate cut is far from a sure thing either. However, by August, the MPC will likely have weaker pay growth data and a convincing story that the temporary NMW effect is fading and will likely see services inflation weaken. We think that will be enough to trigger an August rate cut.

 

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