Regular pay rose 3.7% in the three months to August. If the central bank lifts its base rate a quarter point to 4% next month, as expected, the gap between the policy rate and pay growth would widen from about 0.05 points to 0.3. Rate-setter Megan Greene speaks on Tuesday.
The Bank of England's case for raising interest rates rests on a question about wages. Tuesday's data gave a small answer in one direction.
Regular pay in Britain rose 3.7% from a year earlier in the three months to August, the Office for National Statistics said, slightly above the 3.6% median forecast in a Reuters poll of economists. The figure excludes bonuses, which policymakers watch because it tracks the underlying cost of labor more closely.
Why the central bank cares
Markets and economists expect the Bank of England to lift its base rate a quarter point, to 4%, when it meets next month. Policymakers worry that higher energy costs tied to the Iran war are seeping into prices well beyond fuel, and pay is one of the main channels for that. When workers demand higher pay to cover higher living costs, and employers pass those costs on, an energy shock becomes persistent.
Governor Andrew Bailey said last week that a longer war would make it more difficult for the bank to hold off. In the same remarks, he called it "early days" and described inflation pressures as "quite subdued."
A small beat
A 0.1-point overshoot is a narrow margin, and it does not on its own show that wage-setting has shifted. It does remove one argument for waiting. Policymakers who wanted evidence that pay growth was slowing before acting did not get it.
Rate versus pay
A quarter-point move to 4% implies a current base rate of 3.75%, by this publication's arithmetic, almost level with the 3.7% pace of regular pay growth. After a hike, the bank's rate would sit about 0.3 points above it. The gap is modest, but it would mark the point at which the cost of borrowing clearly outpaces the growth in what workers earn.
Gilts have been selling off alongside other government debt. The 10-year gilt traded near 5.43% late on Monday, while in the U.S. the 10-year Treasury closed at 5.15%, 6 basis points higher than on Friday, according to Treasury data.
Market implications
The argument for moving now is simple. Pay is running above forecasts, energy costs remain elevated with Brent above $110, and a central bank that waits risks letting the shock embed itself in wages.
The argument for patience is that the data are still thin. The beat is a tenth of a point, the governor himself calls inflation pressures subdued, and raising rates into an energy shock risks deepening the hit to growth that the shock itself causes.
What to watch
Megan Greene's remarks at the London School of Economics on Tuesday; Britain's September consumer prices on Wednesday; the bank's decision on Nov. 5; gilt yields at the two-year maturity, which are most sensitive to rate expectations; and oil prices. Comments from Greene endorsing a move next month would make a hike close to fully priced.