The labor market in the United Kingdom outperformed even the highest expectations of economists in data on Tuesday, piling pressure on the Bank of England (BoE) to act again to contain unrelenting inflationary pressures.
British wage growth soared and employment also jumped in the three months to April, according to the Office for National Statistics (ONS), raising expectations that the BoE would raise interest rates again, perhaps several times, as the U.K contends with one of the highest inflation rates among major advanced economies.
The sterling shot up by around a third of a cent against the dollar to $1.255 in response to the data, which RBC bank said was "unambiguously strong."
The figures underlined signs that the economy is not cooling as the BoE had hoped so that momentum fades from rising prices.
Annual growth in wages excluding bonuses jumped to 7.2% in the three months to April from the same period the year before, as against the equivalent 6.6% increase recorded in January. Economists polled by Reuters had forecast a 6.9% rise on average.
The spike, which was largely due to a near-10% increase in the minimum wage at the start of April, was the highest on record other than when the figures were distorted by the coronavirus pandemic.
Including bonuses, wage growth jumped to 6.5% from 6.1% previously, but it still lagged consumer price inflation, which at the last count stood at 8.7% in April, meaning that Britons are suffering declining pay in real terms.
The increase is likely to feature heavily in next week's deliberations among rate-setters at the Bank of England. Higher wages raise the prospect of more spending in the economy, which can fuel price rises.
Hannah Slaughter, senior economist at the Resolution Foundation, said this "welcome news" for workers will "worry the bank, and by extension anyone looking to remortgage, as it adds to the case for raising interest rates for longer."
Like other central banks around the world, the BoE has sought to keep a lid on inflation, which over the past year has been fueled by Russia's invasion of Ukraine. That sent energy prices soaring, a development that then led to price increases across a wide array of goods and services.
"For the Bank of England, wage growth is a big problem – it is simply at too high a level to allow inflation to hit the 2% target," said Hussain Mehdi, macro and investment strategist at HSBC Asset Management.
The BoE has sharply increased its main interest rate to 4.5% from a low of 0.1% in late 2021. Higher interest rates help lower inflation by making it more expensive for households and businesses to borrow, meaning they potentially spend less, thereby reducing upside demand pressure on prices.
"With the possibility of higher-for-longer rates, a U.K. recession looks unavoidable as tight monetary policy filters into the real economy – including the housing market," Medhi said.
Financial markets on Tuesday put the chance of a 0.5 percentage point increase to interest rates at 33%, up from a 17% chance on Monday, and now put at 65% the likelihood that rates will reach 5.75% by the end of the year.
On Monday Bank of England rate setter Catherine Mann said that central banks will find it hard to communicate the end of their rate-tightening cycles and should not sweat over this at the expense of taking steps to bring down inflation.
Separately, the statistics agency said the country's jobless rate fell to 3.8% in the three months to April, from 3.9% in the previous quarter. Most economists had been expecting the rate to edge up to 4%.
Employment rose by 250,000 in the said period, against the Reuters poll forecast for a 162,000 increase.
As the unemployment rate fell, the ONS said, the country's employment rate rose to 76% from 75.9%, with the number of people in work at an all-time high of 33.1 million.
Darren Morgan, director of economic statistics at the agency, said the "biggest driver" in recent jobs growth is health and social care, followed by hospitality.
Though Tuesday's figures were broadly positive, there are still a number of issues surrounding the U.K.'s labor market, with the economy barely growing and inflation running higher than many policymakers would have hoped.
Ben Harrison, director of the Work Foundation at Lancaster University, said the U.K., with 2.55 million people long-term sick, is the "worst performer" among the G-7 nations for workforce participation since the start of the coronavirus pandemic more than three years ago.