BoE inflation forecast unchanged after labour market release

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Labour market stats released today show that wage growth in the economy accelerated in March - continuing on the upward trend seen since June 2014. Combined with the persisting trend of falling unemployment, the picture of an ever-improving UK labour market remains firmly in place. Other indicators of labour market slack also showed improvements, with the claimant count and number of involuntary part-time workers falling, while total hours worked are steadily on the rise.


More money in consumers coffers

March saw the largest 3-month average real (adjusted for inflation) total pay increase since December 2007. Total pay for employees in Great Britain increased by 1.9% in the first quarter of the year compared to Q1 2014. With CPI glued at 0%, this means that inflation is not pinching any pennies out of consumers’ coffers.  

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Manufacturers continue to recruit

In terms of manufacturing, the sector continues to recruit at a healthy pace. Workforce jobs in the manufacturing sector increased by 2% from last year and 0.6% from last quarter. Total pay growth in manufacturing has somewhat cooled this year, with total pay in the industry slowing to 0.4% in March from 1.6% in December 2014.

Still, this slowdown reflects the considerably higher pace of growth in manufacturing pay compared to the whole economy since mid-2012. From June 2012 to October 2014, whole economy total pay has trailed manufacturing pay growth in every single month – a total of 29 consecutive months. As such, average weekly earnings for the manufacturing sector were 16% higher than for the whole economy in March 2015.


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BoE inflation forecast unchanged

The pick-up in wage growth over the first quarter of 2015 has not done much to alter the BoE’s inflation forecast. In its latest Inflation Report, the BoE judges that wage growth in Q1 2015 was still low compared with historic averages despite the rapid erosion of slack in the labour market over the past two years. The Bank attributes a combination of possible factors that could explain the weak wage growth outlook.

First, the shift in the composition of employment growth towards lower-skilled occupations since mid-2013 is estimated to account for about 1 percentage point of the recent weakness in average earnings growth. Second, there could be a higher degree of slack in the labour market than the estimated 0.5% of GDP – a judgement that the BoE recognises is surrounded by significant uncertainty.

Third, wages could be less sensitive to domestic labour market slack as it may have become easier to recruit employees for certain occupations from outside the UK. Finally, wage growth could also remain weak if low inflation or low wage expectations are affecting wage bargaining.

While wage growth is expected to strengthen in the near-term, the continued weakness in wage growth compared with long-term trends has led the MPC to reassess the persistence of the factors dragging on pay growth, especially with regards to the compositional effects. As a result, solid earnings growth in Q1 2015 is not expected to impact on inflation enough to push the BOE’s 2-year CPI forecast to above 2%.

With a range of other factors weighted in as well, the BoE has left its inflation forecast virtually unchanged, although it sees downside risks to the inflation outlook in the near term. As such, the MPC has vote to maintain the bank rate at 0.5%.

 

 

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