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Stirring wage growth and rising unemployment reduce odds of rate hike
UK unemployment increased unexpectedly at the end of last year but wage data was mixed, which may stoke some further speculation about the Bank of England's likely path for interest rate hikes.
The headline unemployment rate for the three months to December rose to 4.4% from 4.3% a month earlier, at which level it was expected to remain. This was the first increase in the unemployment rate in nearly two years.
The Office for National Statistics also revealed a 88,000 increase in employment change in the period, which was half the 165,000 expected, but that it was a rise in the participation rate that pushed the unemployment rate up.
More timely data on the January claimant count showed a 7,200 decline to 0.823m, versus an expected 4,100 increase.
UK average weekly earnings for the three months to December remained 2.5% higher than the same period a year before for the third consecutive reading, as expected, though it jumped by 2.8% if the month of December was taken alone.
Growth in weekly earnings excluding bonuses rose to 2.5%, higher than the average estimate of 2.4% and the figure for the month before, which was revised down to 2.3%. And private sector pay growth accelerated to 2.6% from 2.3%.
With consumer price inflation at 3.0%, the stubbornly low wage growth means household real incomes continue be squeezed.
ONS statistician Matt Hughes said: "While this is the sharpest increase in the unemployment level ONS has seen in almost five years, the number of people in work has continued to rise and there are fewer 'economically inactive' people - those neither working nor looking for a job."
"Rising employment this past year was largely driven by UK nationals. In particular, fewer citizens of the eastern European countries that joined the EU in 2004 and of non-EU countries were in work than in the year before. But it's important to remember these figures simply look at the number of people in work, and aren't a measure of migration."
Economist Ruth Gregory at Capital Economics said it was a "strong set of labour market figures should dispel concerns that the recent weakness was a sign of things to come".
She said pay growth "seems to be starting to benefit from the recent strength of jobs growth at last", pointing to the increase in private sector pay and with the latest pay settlement surveys strong, "a further acceleration in wage growth is in prospect".
The latest labour market data "aren't a decisive blow to the chances of a May rate hike", with two more reports to be published before then, "but they do reduce the odds", said economist Sam Tombs at Pantheon Macroeconomics, who said the rise in unemployment, "looks like a blip, although it will still instil some caution on the MPC".
With wage growth continuing to strengthen modestly, with month-to-month growth in wages excluding bonuses averaging 2.9% in the second half of last year, up from the 2.4% average of the first half, and surveys indicating that pay settlements have picked up at the start of this year, "it won't be long before the headline rate of year-over-year growth in wages climbs to 3%", Tombs said.
With productivity growth also recovering and a decline in consumer confidence over the last six months, Tombs suggests "few individuals will take a risk on a new job, easing the pressure on firms to pay more to retain staff. Accordingly, we continue to doubt that wage growth will recover fast enough to compel the MPC to hike rates again as soon as May."
Looking at 2018 survey data, Chris Williamson at IHS Markit said the labour market was apparently continuing to tighten as staff shortages lead to higher pay rates. "Starting salaries rose at the fastest rate for over two-and-a-half years in January, which should feed through to higher pay growth across the economy.
"However, while pay growth appears to be perking up, there are other signs that the labour market is starting to cool," he said, with the unemployment rate rising and the number of unemployed rising for a third successive month, though this was linked to fewer people seeking employment, rather than redundancies.
"More worrying, employment rose less than expected, up by 88,000 in the three months to December, which mirrors a trend of slower growth of hiring indicated by the surveys. Recruitment agencies reported that demand for staff from employers cooled for a fourth successive month, rising at the slowest rate for 13 months in January," Williamson said.