Will UK Wages Finally Pick Up? Probably, But Modestly

Without higher wage growth, the recovery in the UK will become increasingly difficult to sustain, and inflation will remain stubbornly low.
— Mike Amey
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Will UK Wages Finally Pick Up? Probably, But Modestly

The week of 15 June sees a raft of UK data releases. Two of these – the consumer price index (i.e., inflation) and labour statistics – are crucial for the outlook of the UK economy, and in turn the future path of UK interest rates.

Headline consumer price inflation is expected to nudge back into positive territory at 0.1%, but arguably more important is the UK labour market report on 17 June. To date, the labour market has been characterised by sharply falling unemployment, but also by stubbornly low wage growth. Over the last two years, the UK unemployment rate has fallen from 7.8% to 5.5%, and now sits within 0.5% of the level economists would typically associate with full employment. Annual wage growth, however, remains low at 1.9% and is not expected to improve significantly in the new release.

Given the continued downward pressure on inflation from the rise in the value of the trade-weighted sterling index, it is crucial that UK wages start to improve. Without higher wage growth, the recovery in the UK will become increasingly difficult to sustain, and inflation will remain stubbornly low.

Our base case expectation is that we will see a modest rise in wages during the months ahead, such that the Monetary Policy Committee at the Bank of England could start to raise interest rates in due course, most likely beginning in the middle of 2016. Without an increase in wages, this normalisation could be pushed yet further back.

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