According to figures released by the Office for National Statistics (ONS) this morning, the UK unemployment rate stood at 3.8% between February and April 2023. This marked a 0.1 percentage point increase on the 3.7% recorded in the three months to January. Meanwhile, the employment rate stood at 76.0% in the same period, up 0.2 percentage points on the quarter before. The number of people in employment also increased to a record high. One sign of a loosening in the labour market came from the 11th consecutive decline in vacancy numbers in March to May, down by 7.0% on the previous quarter, to stand at 1,051,000.

The economic inactivity rate decreased by 0.4 percentage points on the quarter, to 21.0% in the three months to April. This allowed for a rise in the employment rate alongside the simultaneous rise in the unemployment rate. The fall in inactivity was largely driven by those inactive for ‘other reasons’ and those looking after family or home returning to the labour force. Meanwhile, those inactive because of long-term sickness increased to a record high, now making up 29.2% of those who are economically inactive.

Wage growth data was also released today by the ONS, showing workers were continuing to experience a significant rise in nominal earnings in February to April. Annual growth in employees’ average regular pay was 7.2%, which is the fastest growth rate seen outside the pandemic. Furthermore, average regular pay in the private sector was 7.6%. Though this still stands below the rate of price growth, with real regular pay falling by 1.3% on an annual basis, the gap is closing. Indeed, the annual change in real regular pay stood at its highest level since Q1 2022. It should be noted that while the minimum wage increase in April will have supported some of the annual increase in wages, the ONS data show that higher paying sectors such as finance and business services saw the largest rises.

Today’s wage growth data highlight the risk of a wage-price spiral to inflation. Annual price growth on the Consumer Prices Index (CPI), slowed to 8.7% in April, which was driven by particularly stark slowdowns in price growth for electricity and gas. However, despite this deceleration, Cebr does not expect inflation to fall back to the Bank of England’s 2.0% target any time soon. With inflation and wage growth both at very high levels, and unemployment remaining at a low rate, employees have been able to bargain for higher wages to cover their rising living costs. As the volatile components of inflation, such as energy, bring down the headline rate of CPI, stickier components, such as consumer services, may cause inflation to persist. This will particularly be the case if wage growth stays high, as this will encourage businesses to raise prices in order to maintain their margins. This morning’s wage growth data have, therefore, increased the likelihood of an interest rate rise from the Bank of England later this month, as policymakers need to try to limit the extent to which a wage-price spiral becomes entrenched. Cebr expects a hike of 25 basis points, taking the base rate to 4.75%.

Josie Anderson is Managing Economist at the CEBR.

Write to us with your comments to be considered for publication at letters@reaction.life