UK wage growth slowed to a two-year low in May amid a cooling labor market, underscoring the challenge for the Bank of England as policymakers decide whether to cut interest rates.
Figures from the Office for National Statistics (ONS) show that annual wage growth eased from 5.9% in the three months to April to 5.7% in the three months to May, matching forecasts by City economists.
Unemployment was unchanged from April’s 4.4%, while job vacancies fell by 30,000 due to falling demand in retail and hospitality as hiring continued to slow across the economy.
After a sharp decline in headline inflation in recent months, real wage growth has picked up, taking into account the rising cost of living. Total real wages, including bonuses, increased by 3% year-on-year in the three months to May. Growth was last higher in the three months to August 2021, when it was 4.5%.
Liz McKeown, director of economic statistics at the ONS, 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.
“Earnings growth in monetary terms, while remaining relatively strong, is once again showing signs of slowing. However, with inflation falling, it is the highest in more than two and a half years in real terms.
In a sign of a cooling labor market, the latest snapshot showed more than 500,000 more people are out of work now than last year, driven by a rise in economic inactivity – when working-age adults are neither working nor looking for one.
While economic inactivity has fallen in recent months, it remains near a record high of nearly 9.4 million, with nearly a third out of the labor force due to near-record levels of long-term illness.
Liz Kendall, the new Work and Pensions Secretary, said the UK remained alone as the only G7 country where employment rates had not returned to pre-pandemic levels. “This is a truly terrible legacy that the government is determined to deal with,” she said.
“Behind these statistics are real people who have been ignored and denied the support they need to get into work and stay in work for too long. It’s time for change.”
Financial markets expect the Bank’s policymakers to delay cutting interest rates from the current level of 5.25% at their meeting on August 1, instead waiting until they are confident inflation will remain close to the government’s 2% target before cutting borrowing costs.
Threadneedle Street has previously warned that inflation is likely to rise above 2% this year due to resilient wage and price growth in the services sector of the economy.
The data comes after headline inflation unexpectedly stood at 2% in June for a second straight month, while core measures from the services sector also held steady, likely dashing hopes of an August rate cut.
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Although wage growth is cooling, at 5.7% it remains at odds with the bank’s 2% inflation target, according to economists. Ashley Webb, UK economist at consultancy Capital Economics, said the slowdown in the labor market was likely not enough to offset strong services inflation.
“As a result, we have changed our forecast for the timing of the first rate cut from 5.25% in August to September, although it is a close call,” he said.
Several members of the bank’s monetary policy committee, including its chief economist Huw Pill, warned last week that inflation in the services sector and a tight labor market could force Threadneedle Street to be cautious.
Last month, the European Central Bank became the first major global central bank to cut official borrowing costs. It left interest rates unchanged on Thursday.
US Federal Reserve Chairman Jerome Powell indicated this week that he would not necessarily wait for US inflation to fall to its 2% target before cutting interest rates, boosting expectations for a cut in September.