Pace of earnings is not consistent with Bank of England’s inflation target

This morning’s UK employment figures show further signs of slack developing in the labour market.

Headline unemployment ticked higher to 4.3% in the three months to March, the highest level since last July, although concerns remain over the reliability of the data, amid ongoing ONS survey issues.

While said concerns are not present in terms of the earnings component of the report, said figures are likely to cause some concern on Threadneedle Street, with regular pay growth having reaccelerated over the same period, to 5.7% YoY.

Clearly, such a pace of earnings growth is not consistent with a return to the BoE’s 2% inflation target, while upside earnings risks do remain, particularly with April’s minimum wage hike, and likely comparable earnings increases among other lower-wage earners, yet to feed into the data.

At the margin, today’s wage data somewhat raises the risk of inflation persistence within the UK economy, which is a factor that the MPC’s hawks are likely to point to as a reason to delay the first Bank Rate cut to the end of summer.

Despite that, headline inflation should still fall to the 2% target in both April and March, primarily due to the impact of lower consumer energy prices, as a result of the lower Ofgem price cap, exerting significant downward pressure on headline price metrics.

This, of course, must be coupled with the continued rise in joblessness, along with the likely need for a looser policy stance in order to support the solid 0.6% QoQ pace of growth notched by UK Plc in the first three months of the year.

Hence, the outlook for the BoE remains largely unchanged, with policymakers continuing to pay most attention to incoming inflation metrics, with the April CPI figures due next week.

With that in mind, the base case remains that the first 25bp Bank Rate cut will be delivered in June, with quarterly cuts beyond then, so long as the two inflation prints due before then are in line with, or better than, the Bank’s latest forecasts. Today’s data, however, increases the likelihood that such a decision to cut is unlikely to be a unanimous one among MPC members.