UK Wage Data to Confound Expectations in September and October says Oxford Economics

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The Bank of England's inflation problem is not going to fade as fast as it hopes according to new data that reveals the UK labour market remains strong and consistent with churning out inflation levels above the Bank's own forecasts.

Oxford Economics says its unique sentiment data correctly pointed to the tightness of the labour market in July as well as the pressure it would place on the Bank's Monetary Policy Committee (MPC) to raise rates in August.

"Our data up until the end of August shows that the next two ONS labour market releases in September and October are likely to beat the MPC's current forecast," says Innes McFee, Chief Global Economist at Oxford Economics.

He says the incoming data will raise alarm bells in the MPC about the persistence of inflation over the quarters ahead.

Above image courtesy of Oxford Economics.

The British Pound has outperformed its peers in 2023 as the Bank of England has grown more 'hawkish' in its fight against inflation with successive interest rate hikes and more forceful, simplified guidance.

The market is currently fully priced for another 25 basis point rate hike in September, but the odds of a pause grow beyond this point.

The findings from Oxford Economics suggest it might be too soon for the Bank to end its hiking cycle - a development that would underscore the Pound's period of outperformance - even as concerns grow that the scale of rate hikes will cause a major economic slowdown in the months ahead.

Oxford Economics finds the Bank has been unable to create the significant slack required in the labour market (job losses) required to ease pressure on wages and bring down domestic inflation.

"The UK labour market is not cooling quickly enough to alleviate the pressure on the Bank of England to keep monetary policy tight, in our view. According to our proprietary sentiment data developed in collaboration with Penta, employment growth looks to have slowed marginally but not enough to help ease wage growth," says McFee.

Oxford Economics' interpretation of the data suggests that wage growth will once again beat the Monetary Policy Committee's wage growth forecast in September (data for July) and then again in October (data for August).

"Our sentiment data also implies that consumers – understandably buoyed by bumper wage and job growth – increased their spending by 0.5% in the three months to August," says McFee.

According to the economist, a strong labour market will elevate concerns about persistent inflationary pressure among some members of the MPC.

"If wages do continue to rise significantly more strongly than the committee expects then it may have to re-evaluate the peak in rates. Though we may be some way from that risk materialising, especially with much of the past tightening yet to be felt in the economy, it is growing," he adds.