Wage growth hits five-year high but unemployment rises

Jessica Morris
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Strong wage growth could split the BoE's monetary policy committee (Source: Getty)

While UK wage growth soared to a five-year high in the three months to May, unemployment unexpectedly rose for the first time in more than two years.

Average weekly earnings, including bonuses, rose 3.2 per cent during this period, slightly below economists' expectations for a 3.3 per cent rise according to figures released today by the Office for National Statistics. At the same time, unemployment rose to 5.6 per cent, defying economists' predictions that it would stay flat.

The data showed 30.98m people were in work in the three months to May, 67,000 less than the previous three-months. At the same time, the number of part-time workers fell by 97,000, but the number of full-time workers increased by 30,000.

"The latest data show private sector pay growth is approaching rates that would normally start to worry policymakers into tightening policy to avoid wage-price spirals developing. However, a fall in employment in the three months to May is a concern which could lead to further hesitation in starting the policy normalisation process," Chris Williamson, chief economist at Markit, said.

"A big unknown is the extent to which policymakers will want to act ahead of these inflationary pressures picking up."

Strong wage growth could encourage some members of the Bank of England's monetary policy committee to hike the benchmark interest rate from a record low 0.5 per cent. Wage growth is a good proxy of slack - or how much more the economy can grow by before it starts to stoke inflation.

Yesterday Bank of England boss Mark Carney sent sterling soaring after he told the treasury select committee that the point at which interest rates may begin to rise is moving closer. Carney also said households should start to manage their finances in light of the fact borrowing could become more expensive in the future.

His comments were echoed by David Miles, one of the most dovish members on the monetary policy committee, who said that the first interest rate rise "clearly is coming" and that this isn't a bad thing. Miles argued that the "the risks of waiting too long and then not being able to take a gradual path".

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