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UK Wage Growth Accelerates, Emphasizing BoE's Inflation Concerns

British pay growth accelerated in the final quarter of 2024, as per official data released on Tuesday. This development highlights why the Bank of England is proceeding cautiously regarding further interest rate cuts despite an overall sluggish economy.

Private-sector pay excluding bonuses, the Bank of England's key indicator of domestic inflationary pressures, increased by 6.2% compared to the same period a year earlier, marking the fastest growth in a year. The Office for National Statistics reported an uptick from 5.9% in the three months leading to November.

Following the data release, the pound strengthened against the dollar. Suren Thiru, Economics Director at ICAEW, mentioned that the data did not reflect economic deterioration, suggesting that an interest rate reduction at the Bank of England's upcoming March meeting was improbable. However, he cautioned that factors such as a stagnant economy, a more relaxed labor market, and rising business costs could curtail the current wage growth upswing.

Businesses expressed concerns that an imminent increase in social security contributions starting in April, proposed by Finance Minister Rachel Reeves, would dampen hiring and wage growth. Nevertheless, wage hikes have consistently outpaced levels aligned with the Bank of England's 2% inflation target.

The Bank of England anticipated a 6.3% annual private sector wage growth rate in the fourth quarter of the previous year, slightly higher than the ONS figure, with an expected deceleration throughout this year. BoE Chief Economist Huw Pill highlighted supply issues, including labor shortages, as the primary challenge for the UK's sluggish economy.

Overall pay across the economy, excluding bonuses, showed a 5.9% increase in the final quarter of 2024 compared to the previous year, marking the highest growth since April. Considering bonuses, pay rose by 6.0%, the fastest rate since the end of 2023.

A Reuters poll had correctly anticipated a 5.9% rise in both wage measures. The Bank of England foresees a slowdown in pay increases as economic weaknesses continue to impact the labor market.

While GDP stagnated in the third quarter of 2024, it unexpectedly grew by 0.1% in the last quarter. A recent survey revealed that about a third of employers intended to reduce headcounts in response to the tax hike proposed by Reeves.

Official data from Tuesday showed a decrease of 9,000 vacancies from October to January but remained 23,000 higher than pre-pandemic levels. Employer data submitted to tax authorities indicated a 21,000 increase in employees from December to January, marking the third rise in eight months.

The unemployment rate in Britain, as per the ONS, remained at 4.4%, although the accuracy of this metric is under review.