UK’s wages rise as inflation eases

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A busy week for the British pound saw two significant reports coming out last week. The labor market report continued to leap to new highs. While the unemployment rate was steady, wages grew at a faster than expected pace.

Meanwhile, inflation eased suggesting that the squeeze on household incomes was easing. Combined, the data indicates that the Bank of England officials will have some room to keep the monetary policy steady as the government continues to negotiate its way through the Brexit talks.

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UK’s wage growth accelerates at a faster pace

Wage growth in the United Kingdom was seen rising at the quickest pace in summer in nearly a decade. The higher page of wage growth suggested underlying inflation pressures could start to build.

The unemployment data cemented expectations that if wage growth keeps up at the current pace, it will trigger the Bank of England to start preparing the markets for another rate hike in the course of the next two years. This would be required in order to keep the overall price growth in check. However, the rate hike is subject to other issues such as the UK securing a smooth Brexit deal.

Data from the UK’s Office for National Statistics showed on Tuesday last week that the nation’s average weekly earnings excluding bonuses jumped 3.1% in the three months through August. This was the highest increase seen since early 2009, according to official reports.

The uptick in the pay growth came due to some factors including a renewed labor market. The official unemployment rate for the three months through August was unchanged at 4.0%. The unemployment rate has been steady for three consecutive months. Meanwhile, the number of people employed in the workforce was at 32.4 million which is close to a record high.

The Bank of England hiked interest rates in August. Officials noted that they anticipate two or three more rate hikes in the course of the next few years to tame inflation. The UK’s inflation rate has consistently overshot the BoE’s target rate of 2.0%.

The rise in inflation came since 2016 when the UK voted to leave the EU. This resulted in a steep decline of the pound sterling, and it pushed the price of UK imports higher thus eroding the purchasing power for the average citizen.

The data showed that there was still some pressure felt on the UK’s household despite the pick up in wage growth. For the past three months and accounting for the changes in consumer prices over the year, wage growth excluding bonuses for the three months ending August rose just 0.7% on the year.

The Bank of England officials have remained cautious as the UK and EU Brexit talks have yielded no clear outcome so far. The UK is expected to part ways with the EU from March next year. Fears of a hard Brexit, meaning no trade deal is expected to hit the UK’s economy hard.

UK inflation eases faster than expected

The latest inflation report from the UK showed that consumer prices fell sooner than expected. Data from the UK’s ONS showed that headline inflation rate eased from 2.7% in August to 2.4% in September on an annualized basis.

The headline report gives the Bank of England officials more time to assess the economy amid the Brexit backdrop. The headline CPI was also below the median estimates which forecast a dip to 2.6%. Core inflation which excludes the volatile food and energy prices slowed to a pace of 1.9% on the year in September. In August, core CPI was at 2.1%.

“Food was the main downward pull on inflation as last year’s September price rises failed to reappear, while ferry prices dropped after their surprisingly high summer peak,” ONS Head of Inflation Mike Hardie said.

On a monthly basis, inflation rose 0.3% which was also below the forecasts of a 0.5% increase. The output price inflation remained high advancing 3.1% and marking a jump since July 2016.

The UK’s producer prices index, on the other hand, increased indicating that inflationary pressures continue to remain.

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