Janus Henderson: UK MPC on course for risky rate hike

Annual growth of average weekly earnings, smoothed over three months, was unchanged at 2.8% in February and below a consensus forecast of 3.0%. The undershoot, however, reflected lower growth of bonus payments – the ex. bonuses measure moved up to 2.8%, the highest since 2015.

Hourly pay, moreover, is rising considerably faster because of a fall in average weekly hours worked over the last year. Hourly earnings growth, including or excluding bonuses, is estimated to have increased further to 4.0% in February, with the ex. bonuses measure the highest since 2009 – see first chart.

The recent acceleration of hourly earnings has outpaced a modest improvement in growth of productivity (i.e. output per hour), implying stronger unit wage cost expansion – second chart. Annual productivity growth rose to 1.0% in the fourth quarter of 2017 and may have increased slightly further in the first quarter, reflecting the dropping-out of a quarterly decline a year earlier. With hourly earnings growth at 4.0%, however, annual unit wage cost expansion may have moved up towards 3% last quarter, after 2.4% in the fourth quarter.

MPC concern about labour market overheating will be heightened by a further fall in the unemployment rate to 4.2% in the three months to February and 4.0% in February alone – below a forecast of 4.3% for the first quarter in the February Inflation Report.

Increased labour cost pressures support the view here that consumer price inflation will be slower to return to the 2% target than the MPC projected. As previously discussed, however, these pressures reflect past monetary and economic strength – current weak monetary trends suggest diminishing medium-term inflation risks, with narrow and broad money growing at annualised rates of only 1.6% and 1.1% respectively in the three months to February. A May rate hike would risk exacerbating this weakness.​