ONS employment data give BoE a problem

12 April 2022

UK unemployment dropped to 3.8% in the three months to February, while wage growth climbed to 4%, new figures from the Office for National Statistics revealed but the figures pose problems for the Bank of England’s Monetary Policy Committee, with stagflation a threat.

The number of people unemployed for up to 12 months dropped to a record low during the period, while the number of people unemployed for over 12 months also continued to decrease.

Meanwhile, demand for workers remains high as the UK continues to bounce back from the pandemic, with the number of job vacancies in January to March hitting a new record of 1.29 million.

But while the labour market continues to experience a relatively strong recovery, the impact of inflation and rising energy bills risk leaving people feeling the squeeze.

The ONS said that in real terms adjusted for inflation, growth in total pay was just 0.4% and regular pay fell on the year.

Derrick Dunne, CEO of YOU Asset Management, said: “Wage growth is already lagging behind inflation and the CPI reading is expected to confirm that prices are still rocketing.

“With these and other issues to contend with, the last thing the Bank of England needs is businesses struggling to build their labour force or pressure for employers to increase salaries entrenching inflation even deeper for the long term.

“Vacancies remain at a record high and the pang of this week’s disappointing data will continue to sting in the minds of the Monetary Policy Committee as it meets to decide on interest rates in May.”

Laith Khalaf, head of investment analysis at AJ Bell, commented: “Looking at the latest picture of the labour market in isolation, you could be forgiven for thinking that we were living through a consumer boom. The reality is that what we are seeing in the labour market is the calm before the inflationary storm. This month price rises are going to move up a notch and really exert pressure on consumer purses, especially when combined with tax and National Insurance increases.

“It’s hard to know what to wish for on wages. On current trends, the shortfall between wages and inflation means workers will be feeling the pinch. On the other hand, if wage growth were to rise significantly from here that would indicate the inflationary spiral is lifting off and we could be in for a more prolonged period of price rises.

“Looking at the glass as half full, at least we are approaching the inflationary storm from a position of strength in the labour market with unemployment being as low as it is.”

Khalaf said that looking ahead, 2023 was “causing real concern” as the effects of inflation, tax increases and interest rate hikes conspire to put the brakes on economic growth.

Khalaf added: “Just how slow the economy goes, no one knows, but the risk of stagflation is clearly there no matter how rosy things look in the labour market right now.”

Hinesh Patel, portfolio manager at Quilter Investors, echoed the sentiment: “While the labour market appears to be making a steady recovery as we move further out of the pandemic, it will not stop those in work facing continued pressure on household costs as a result of soaring inflation and rising energy bills. Given the recent introduction of the new energy price cap and the national insurance increase, this is likely to get worse before it gets better.”

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