Wage growth eases as payrolled employment falls, cooling rate rise expectations

The Bank of England's interest rate decision in November just became slightly less certain. New figures from the Office for National Statistics released this week showed that basic wage growth in Britain has begun to ease, a development that may give policymakers some breathing room as they weigh whether to raise rates for a sixteenth consecutive time.

Average basic wages grew by 7.8% in the three months to August compared to the same period a year earlier, down marginally from a revised 7.9% the previous month. When bonuses are included, the picture softens further. Average weekly earnings rose 8.1% year-on-year, a noticeable drop from 8.5% in the prior reading. The decline in the bonus-inclusive figure is partly explained by public sector pay awards distributed in June, which created an unusually high comparison point for the latest month.

For the Bank's monetary policy committee, this data arrives as something of a relief. Wage growth has been running at its fastest pace in 22 years, a fact that has troubled officials worried about a wage-price spiral. The logic is straightforward: if workers' pay packets grow faster than inflation, household spending power increases, which can push demand higher and drive prices up further. Inflation currently stands at 6.7%, meaning real wage growth—the increase in purchasing power after accounting for price rises—has finally turned positive for the first time in 18 months. That shift alone has been enough to keep policymakers alert.

Yet the committee held back from raising rates at its most recent meeting, citing other factors that warranted caution. Chief among them was inflation's steeper-than-expected decline, a development that suggested the worst of the price surge might be passing. The question now is whether that trend will continue. If inflation keeps falling, the case for further rate rises weakens considerably. If it stalls or reverses, the Bank may feel compelled to act again.

Market participants have already begun to shift their bets. Before the ONS release, roughly 70% of traders surveyed by Refinitiv believed the Bank would hold rates steady at its November 2nd decision. After the data came out, that figure jumped to 77%. In other words, the wage figures made a rate rise seem less likely, not more.

Other labour market signals point toward a cooling economy. Payrolled employment fell by 11,000 in August, a modest but meaningful decline. Job vacancies, which had been a stubborn source of wage pressure, dropped to 988,000 in the three months to September from 998,000 in the prior quarter. Neither figure suggests a labour market in crisis, but both indicate that the tightness that has been driving wage growth may finally be easing.

The full picture of the labour market remains incomplete. The ONS said it would delay publication of unemployment figures and related data until next week, citing low response rates to its surveys. That means policymakers and markets will have to wait a bit longer for the complete September employment picture. In the meantime, the wage figures have done their work: they have made the case for another rate rise in November a little bit weaker than it was before.