A recent analysis published by the Bank of England (BoE) indicates that the underlying momentum in British workers' pay may have been stronger in early 2024 than what official data has shown. This revelation comes at a time when rapid pay growth remains a critical factor preventing the BoE from lowering interest rates from their 16-year high of 5.25%, despite inflation reaching the 2% target in May.
Official figures reported that average weekly earnings between February and April 2024 were 5.9% higher than the previous year. This was a decrease from a peak of 8.5% in mid-2023 but still about double the rate most BoE policymakers consider consistent with 2% inflation. When excluding bonuses, wage growth fell from 7.9% to 6.0% over the same period.
Insights from the New Wage Growth Measure
The new measure, calculated by BoE economist Tomas Key, aims to strip out more temporary volatility from the data to provide a clearer picture of the underlying wage trend. This measure showed that pay growth was around 6.5% in the first quarter of 2024. Unlike the official data, this measure has increased since late 2023, when it was just under 6%, and has decreased less from a peak in 2022.
Key noted the "considerable uncertainty" about the exact level of underlying wage growth but affirmed that the trend was significantly higher than pre-pandemic levels. His analysis, representing his views rather than the official stance of the BoE, involved examining wage data across 24 economic sectors, isolating persistent variations in wage growth from temporary fluctuations.
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Broader Implications and Economic Context
The findings underscore the complexity of the current economic landscape in the UK. The persistent high wage growth poses a challenge for the BoE's monetary policy, particularly in deciding whether to cut interest rates. The new wage growth measure suggests that additional moderation in wage increases is necessary for price inflation to return sustainably to target levels, unless productivity growth rates improve significantly.
The broader context reveals that the UK has experienced marked increases in nominal wage growth in recent years, reaching levels not seen in over two decades. This strong growth, though slightly moderated recently, remains well above pre-pandemic levels. Assessing whether this trend will persist is crucial for the BoE's policy decisions, given the link between labor costs and pricing strategies of firms.
Using a multi-sector statistical model, Key's approach decomposes sectoral wage growth into trend and transitory components. This method accounts for sector-specific variations and overall economic trends, providing a more nuanced understanding of wage dynamics. The model also incorporates time-varying parameters to reflect structural changes in the economy, particularly post-pandemic fluctuations.
The BoE's new measure of underlying wage growth suggests that pay increases in the UK were stronger than official data indicated in early 2024. This persistent wage growth is a key consideration for monetary policy, as the BoE aims to manage inflation and economic stability. The analysis highlights the importance of continued monitoring and adaptation to evolving economic conditions to ensure sustainable growth and stability in the UK economy.
