Declining Wage Growth Has Hit Its Floor — Here's Why

As the decline in wage growth hits a floor and food inflation ticks up, the BoE may hold firm on rates amid worrying inflationary pressures.

Wage Growth Spurs Worry

The huge uptick in the unemployment rate to 4.3% from 4.0% this morning may have caused some premature excitement amongst rate cut advocates. But as mentioned yesterday, this appears to be a continuation of sampling errors from the labour force survey, rather than any substantial labour market deterioration. This took markets a while to comprehend, as the pound only regained its losses a good 2 hours post-data release.

Tip: In today's circumstances, if the pound loses value, it implies that markets are anticipating a higher chance of a December rate cut.

Meanwhile, the two wage growth metrics (inc. vs ex. bonuses) saw their path diverge for the first time since February, as regular earnings growth took a step down to 4.8% from 4.9% (consensus was 4.7%), while total earnings growth ticked up for the first time since in 7 months, to 4.3% from 3.9% (consensus was 3.9%). The latter continues to remain elevated due to the effects of one-time pay bonuses.

Tip: Wage growth metrics in the UK work on 3-month averages. Therefore, public sector pay bonuses are still part of the September dataset.

Even though the Bank of England (BoE) will be pleased to see regular wage growth continues to cool, they still came in above estimates. But perhaps more crucially, they remain well above their pre-pandemic average of c.3.5%, which will continue to concern the Monetary Policy Committee's (MPC) more hawkish members, such as Huw Pill and Catherine Mann.

While bearish economists will point towards 28 consecutive months of declining vacancies as a sign of labour market weakness,  leading indicators for pay aren't pointing in that direction. That's because taking the latest Pay As You Earn (PAYE) data, median monthly pay is forecast to have jumped a whopping 0.9% in October, with a 7.0% year-on-year increase. This would mark the biggest annual increase since August 2023.

In addition to that, third party surveys have been proving stubborn on the year-ahead wage expectations metric. The Chartered Institute of Personnel and Development (CIPD) latest report showed wage expectations stuck at 3.0%, while the BoE's Decision Maker Panel survey saw year-ahead wage growth remain unchanged at 4.1%. Add looming minimum and living wage increases, and the path to lower wage growth looks complex.

Pill of Caution

As a result, it comes as no surprise that MPC member Huw Pill signalled his reluctance to vote for another rate cut in December at this morning's UBS conference. The BoE's Chief Economist said that last week's rate cut does not mean that the job is done, stating that more work needs to be done, as wage growth remains at high levels, despite substantial disinflation occurring.

On that basis, we anticipate Catherine Mann to echo the same sentiment in her speech on Thursday. That said, Andrew Bailey's comments will be one to keep a close eye on, as the Governor's stance could paint a clearer picture on the outlook for a December cut.

Grocery Bills Keep Markets Grilled

To further support our thesis that wage growth has hit a bottom, the latest Kantar take-home grocery inflation metric continues to rise, to 2.3% from 2.0%. What does that have to do with wage growth? Well, historically, food inflation and inflation expectations have a very close relationship. Hence, further upticks in food inflation could undermine the decline in wage growth, putting pressure on services inflation, and delay further rate cuts.

All in all, given today's data, we maintain our view that the BoE has concluded its rate-cutting cycle at 4.75% for 2024, with the next cut only expected in February 2025.

Having said that, grocery sales did increase by 2.0%. Supermarkets witnessed their busiest month since the onset of the pandemic, as households made a record 480m shopping trips in preparation for the festive season, also showing signs that the cost-of-living crisis continues to ease up. Consequently, premium grocers such as Waitrose and Ocado continued to see market share gains, alongside big boys, Tesco and Sainsbury's.