Written By: Miles Pearson – Forex Focus
Will the November rate hike balance wage growth with consumer inflation?!
The seasonally adjusted jobless rate in the United Kingdom declined to 4.3 percent in the June-August quarter, the lowest since 1975 and slipping from close to 5 percent from the period a year earlier, according to the Office for National Statistics (ONS), which published the data on October 18, 2017. The unemployment rate is a measure of unemployed individuals in the age group of 16-64 years who have been actively seeking work over the past four weeks and are readily available to start working within the next two weeks. It also includes individuals who are currently unemployed but have found employment and are expected to begin in the next couple of weeks.
Coming to wage growth, the average annual weekly earnings of employees in nominal terms (not adjusted for inflation) increased by 2.2 percent with bonuses and 2.1 percent excluding bonuses. However, real wages (adjusted for inflation) declined by 0.3 percent in the three months to the end of August 2017, compared to the same period last year. Compared to the previous three months, nominal wage growth has remained unchanged, although it registered a rise to 2.7 percent from 2.3 in the financial sector, 1.3 to 1.6 percent in manufacturing and accelerated to 1.2 percent from 0.3 percent in construction.
Highlighted below are the average nominal and real earnings of employees in the United Kingdom:
- Average nominal earnings excluding bonuses, taxes and deductions: £476 per week;
- Average nominal earnings including bonuses, excluding taxes and deductions: £507 per week;
- Average real earnings excluding bonuses, taxes and deductions: £459 per week;
- Average nominal earnings including bonuses, excluding taxes and deductions: £488 per week.
Adjusted for inflation, regular pay during June-August 2017 declined by 0.4 percent, and total pay dropped by 0.3 percent from a year earlier.
A detailed year-over-year (YoY) analysis shows that in the three months to August 2017, real average weekly earnings (total pay) fell by 0.3 percent, unchanged from the three months to July 2017, while nominal average weekly earnings (total pay) increased by 2.2 percent. During the same three-month period, real average weekly earnings (regular pay) dropped by 0.4 percent, flat when compared to the three months ending July 2017, while nominal average weekly earnings (regular pay) increased by 2.1 percent during July-August 2017.
UK consumer inflation for the month of September rose to its highest level since March 2012 on the back of rising prices in food, beverages and transportation. The YoY figures for September came in at 3 percent compared to 2.9 percent the previous month. The Consumer Prices Index including owner occupiers’ housing costs (CPIH), the most comprehensive measure of inflation, increased by 2.8 percent for the year to September from 2.7 percent in August, and annualized core inflation was flat at 2.7 percent during a similar period. According to the ONS, the inflation rate in the UK has increased over the last year and is comparatively higher than most of the countries within the eurozone due to an increase in commodities prices and a depreciated pound sterling.
On the FX (foreign exchange) front, the pound sterling gave up more than a percent of its gains, after rallying close to 4 percent versus the greenback in September. The UK currency was expected to oscillate in the 1.3100-1.3300 range until the monetary policy announcement on November 2. A rate hike was expected to lead to a breakout from the 1.3000-1.3300 range that the pair held from the start of October and catapult the pound sterling towards 1.3650-1.3700.
A November rate hike was considered to be more or less in the cards, especially after the announcement of the preliminary third-quarter GDP (gross domestic product) numbers, which showed the broader UK economy expanding at a modest pace. With inflation at multi-year highs and way beyond the central bank’s target of 2 percent, and wage growth not rising quickly enough, monetary-policy members were expected to look to balance growth and inflation when they met in November. Markets were already pricing in a rate hike, which was expected to reverse the sagging UK currency in addition to putting the brakes on consumer inflation, at least in the near-term.