image source, Getty Images
- Author, Nick Edser
- Role, Business reporter, BBC News
Wages are rising at their slowest pace in nearly two years as the labor market continues to cool.
Wages rose at a year-on-year rate of 5.7% in the three months to May, but are still outpacing rising prices.
The number of job vacancies fell, while the unemployment rate remained at 4.4% in the three months to May, the Office for National Statistics (ONS) said.
Economists are debating whether the figures will encourage the Bank of England to cut interest rates next month, with the decision expected to be very tight.
Liz McKeown, director of economic statistics at the ONS, said wage growth, “while remaining relatively strong, is again showing signs of slowing”.
“However, with inflation falling, it is the highest in more than two-and-a-half years in real terms.”
After taking into account the effect of inflation, wages increased by 3.2%.
The pace of wage growth is one of the things the Bank of England will consider at its next meeting on August 1 when deciding what to do about interest rates.
The bank tends to raise interest rates – or keep them high – when it believes inflation or wages are rising too fast, in the hope that more expensive debt will slow price and wage growth.
If wages are rising strongly, this can put pressure on firms to raise costs, which they may try to offset by raising prices for consumers.
Inflation data released on Wednesday showed it was unchanged at 2% – in line with the bank’s target, giving some confidence that rates could be cut.
However, price growth in the services sector, which includes businesses such as restaurants and hairdressers, remained strong.
Ashely Webb, a UK economist at Capital Economics, said that while the slowdown in wage growth was “encouraging”, he doubted it would be enough to offset concerns about lingering inflation in services.
“We now expect the bank to cut interest rates from 5.25% to 5.00% in September instead of August,” he said.
Yael Selfin, chief economist at KPMG UK, said the “modest” slowdown in wages growth “offers good news for those looking for a rate cut in August”.
“But with annual wage growth excluding bonuses at 5.7%, the Bank of England may not be willing to risk an August rate cut before the labor market cools sufficiently,” she added.
Pay growth in the private sector slowed to 5.6% from 5.9% in the previous three months, the ONS said, while in the public sector it was unchanged at 6.4%.
Profits grew the fastest in the finance and business services sector, up 6.7%, while the construction sector saw the smallest increase, up 3.0%.
Ms McKeown said: “Overall, we continue to see some signs of cooling in the labor market, with payroll growth weakening over the medium term and unemployment gradually rising.”
Between April and June of this year, the number of job vacancies decreased by 30,000 to 889,000 in the quarter, led by retail and hospitality.
The number of job vacancies has been falling for two years now, but still remains higher than before the coronavirus pandemic.
The proportion of people considered to be “economically inactive” – ​​defined as those aged 16 to 64 who are not working or looking for work – fell slightly to 22.1% between March and May, the ONS said.
That means about 9.4 million people are classified as “inactive,” a figure about 800,000 higher than before the coronavirus pandemic.
There have been concerns about a labor shortage affecting the UK economy.
Work and Pensions Secretary Liz Kendall said the new government had been given a “truly terrible legacy”.
“Spiraling economic inactivity, rising unemployment and the UK as the only G7 country where employment rates have still not returned to pre-pandemic levels.”
One of the problems the Bank of England and others have recently had with using jobs data is questions about the reliability of the data.
The Labor Force Survey, carried out by the ONS, which compiles the data, had fewer respondents than usual over the past year.