The UK economy has created more jobs than anticipated, resulting in an unexpected drop in the unemployment rate.
The Office for National Statistics (ONS) reported on August 13, 2024, unemployment fell by 0.2 percentage points to 4.2 percent in the three months before June.
This positive news was tempered by separate data showing that regular wage growth cooled to 5.4 percent, down from 5.8 percent in the previous period. This marks the weakest year-on-year pay increase since the summer of 2022.
Implications for the Bank of England
These figures present a conundrum for the Bank of England (BOE), which is closely monitoring the labor market for signs of inflation as it considers when to cut interest rates again.
Despite the recent distortion in job figures due to issues with the labor market survey, the BOE remains concerned that a shortage of workers could drive up wages and inflation.
The pound reacted positively to the data, trading 0.2 percent higher at around US$1.28. This labor market report is the first in a series of data releases this week that will influence the BOE's policy decisions ahead of its next meeting on September 19.
Investors are currently betting on the next rate cut arriving in November, but BOE officials have emphasized the need to proceed cautiously as they evaluate the strength of domestic price pressures in the economy.
Upcoming Inflation Data
The prevailing expectation is for no change in interest rates next month. However, upcoming inflation figures due out on Wednesday could provide critical insights. If these figures show the first increase in price pressures this year, it could weaken the case for further easing by the BOE.
Some officials have expressed ongoing concerns about robust wage growth. Catherine Mann, one of the four rate-setters who opposed a change earlier this month, cautioned that an “upward ratchet” in wages and prices could “take a long time to erode away.”
Challenges with Job Data Interpretation
BOE officials have also been cautious about over-interpreting the jobs data, especially after the ONS temporarily suspended its Labour Force Survey last year. The survey is currently undergoing an overhaul, but the introduction of new "transformed" figures has been delayed until next year. This delay adds another layer of complexity to the BOE's assessment of the labor market and its implications for monetary policy.
Long-term Unemployment Projections
Despite the current dip in unemployment, the BOE anticipates that unemployment will rise to 4.8 percent in the coming years. This projection, however, remains below the peaks experienced during the pandemic and the financial crisis.
