A roaring jobs market in the UK is stepping up the case for another rate hike by the Bank of England on Thursday.
Strong demand for workers rubbing up against weak labour supply is intensifying inflationary pressures in the jobs market, demonstrating the UK economy is ready for more rate hikes, according to economists.
The assessments were sparked by fresh figures published by the Office for National Statistics (ONS) today revealing the jobless rate edged back to pre-Covid levels, dropping to 3.9 per cent over the last three months.
A tight labour market runs the risk of inflation being embedded in the economy over the long-run if it prompts firms to hike prices to offset higher costs caused by workers demanding higher pay to offset the rising cost of living.
Prices are already 5.5 per cent higher than they were a year ago, the fastest rate of acceleration since 1992.
A shallower supply of workers has generated strong competition between businesses as they try to outbid each other to secure and retain talent. Vacancies hit another record high of 1.32m.
“The tight labour market will fuel the Bank of England’s fears that high inflation is feeding through into a rise in wage growth that will feed back into inflation,” Paul Dales, chief UK economist at Capital Economics, said.
The workforce shrank by around 100,000 in the three months to January, according to the ONS.
Despite a drop in the unemployment rate, wages are lagging far behind inflation, meaning Brits’ living standards are eroding.
Real earnings fell one per cent, the worst rate of spending power erosion since 2014, the ONS said.
Although the new figures make for damning reading, the living standards shock is set to get even worse in the coming months.
A possible 10 per cent inflation peak in October triggered by the Russia-Ukraine war sending energy prices soaring is set to deal the harshest hit to Brits’ living standards in a generation.
However, a sharp rebound in the jobs market from the pandemic is strengthening the case for the Bank to lift interest rates for the third meeting in a row on Thursday.
Analysts at Goldman Sachs said today’s stats are “consistent with the recent data flow in the UK, which pointed to strong growth momentum, a tight labour market and elevated wage growth prior to the war in Ukraine”.
They, like the rest of the City, are betting Threadneedle Street will send rates 25 basis points higher to 0.75 per cent on Thursday.