Another member of the Bank of England's rate-setting committee as flagged up slow wage growth as a reason they are likely to hold off on voting for an interest rate increase.
"Whatever the causes of the recent weakness, inflation is unlikely to recover back to target without a marked improvement in wage growth," Martin Weale told an audience at the Gatwick Diamond Business group in Crawley yesterday.
Weale said more people were working part-time than in the past, translating to a fall in the average number of hours worked per week. A smaller working week meant, in the absence of productivity growth, firms would produce less output. Weale said the financial crisis had pushed more people into part-time work, but that it was also a voluntary decision for many people.
Read more: Mark Carney rules out rate rise for now
Unit wage costs – which measure the average wage cost per unit of output – will be higher than they otherwise would be, Weale said. This would keep inflation, which the Bank targets at two per cent, below target for longer.
“For me, unit wage costs are the most important indicator of domestic costs: sustained growth in these at more than two per cent per year is not consistent with the inflation target, unless other costs – of raw materials and imports – are growing more slowly than this, as they are at the moment."
He added: "This is particularly true given the backdrop of further recent falls in the oil price driving petrol and energy-related costs down. The general tightening in the labour market, as indicated by the continued fall in the unemployment rate, means that this is likely to happen, in my view. But the outlook for costs themselves is tighter than it seems just on the basis of average wages: the shortening of the average working week is likely to push up on costs in a material way."
Other members of the nine-strong monetary policy committee such as governor Mark Carney, deputy governor Minouche Shafik, and Gertjan Vlieghe have all said wage growth is not high enough to justify an interest rate rise.
The Bank of England's monetary policy committee voted eight to one to keep interest rates at a record low of 0.5 per cent at its January meeting.