UK’s accelerating wage growth highlights BoE’s inflation caution

British pay growth accelerated in late 2024, according to data that suggested the jobs market was holding up and underscored why the Bank of England has been cautious about cutting interest rates despite a weak overall economy.Private-sector pay excluding bonuses – the BoE’s main gauge of domestic inflation pressure – rose by 6.2% compared with the same period a year earlier, the fastest pace in a year, the Office for National Statistics said.Sterling rose against the dollar and investors trimmed their bets on the pace of future BoE rate cuts following the release of the official data, which painted a less weak picture of the labor market than some recent surveys.Still, ING economist James Smith said that could change.”Redundancy levels are low, but the major risk is that it begins to change ahead of tax hikes in the spring. A cooler jobs market should help wage growth come gradually lower as the year goes on,” he said.Employers say finance minister Rachel Reeves’ plan to boost the social security contributions they pay from April – when Britain’s minimum wage is also due to rise by almost 7% – will reduce hiring and wage growth.However, the pace of pay increases has remained far above levels consistent with the BoE’s 2% inflation target.BoE Chief Economist Huw Pill told Reuters last week that he believed the main problem for Britain’s sluggish economy remained one of supply – including a shortage of workers.The ONS said pay across the whole economy, excluding bonuses, was 5.9% higher in the fourth quarter than a year earlier, the strongest reading since the three months to April 2024. Including bonuses, the pay was up by 6.0%, its fastest since the end of 2023.A Reuters poll had pointed to both wage measures rising by 5.9%.US and Russian officials are meeting today in Saudi Arabia for talks on Ukraine,The line chart shows the regular pay growth and inflation-adjusted pay growth in the UK between 2015 and 2024.The BoE expects pay increases to slow soon as weakness in the economy weighs on the labor market. Tuesday’s wage growth data was largely in line with its forecasts.The economy stagnated in the third quarter of 2024 but unexpectedly grew 0.1% in the last three months of the year.A survey published on Monday showed that around one in three employers planned to cut headcount as they responded to Reeves’ tax increase.Tuesday’s official data showed vacancies fell by 9,000 in the three months to January from the three months to October but remained 23,000 higher than immediately before the COVID pandemic.Separate data provided by employers to the tax authorities showed the number of employees climbed by 21,000 in January from December, only the third rise in the past eight months.Britain’s unemployment rate, based on a survey that the ONS is overhauling and is no longer considered an accurate gauge, held at 4.4%.Allan Monks, an economist at JP Morgan, said the data reduced some of the risk of an economic downturn but highlighted Britain’s problem of “sticky” underlying price pressures, leaving the BoE unable to move quickly with rate cuts.”This should reinforce the sense that the MPC (monetary policy committee) will continue to ease but only gradually in the period ahead,” Monks said.