A slowing labour market and a sharp rise in inflation set to keep BoE on hold

Under normal circumstances a fall in the unemployment rate would be good news, and this week’s news that unemployment for the 3-months to February fell from 5.2% to 4.9% does appear to be that.

Sadly, that’s where the good news ends even if you acknowledge the fact that the data from the Office for National Statistics (ONS) has been known to be suspect for several years now.

This was even before this month’s announcement that the problems that they have been having with respect to the labour market data were unlikely to be resolved before 2027, after the government’s statistics agency admitted that the reforms that it had promised this year wouldn’t be completed in time.

If these were the only problems surrounding the economic statistics supplied by this unaccountable government quango, I would be inclined to be more forgiving, however the labour market data isn’t the only set of numbers that have presented problems, meaning that our policymakers are increasingly flying blind when it comes to reliable data.

At the same time, we hear that ONS staff have won the right to work at home on a full-time basis, removing the requirement to be in the office for 40% of the time, and that they should only be required to attend the office when there is a “purposeful need”

I would suggest that supplying the likes of the Bank of England, as well as the UK Treasury with reliable economic data should come under the category of a “purposeful need” at a time when accurate data is needed more than ever. Someone needs to get a grip on our bloated and increasingly unfit for purpose public sector.  

Instead, we have a government agency that seems less concerned about doing what it is supposed to be doing, providing a necessary service to taxpayers, and more concerned about pandering to its entitled employees.

On the unemployment and wages data itself, once you scratch below the headline number of 4.9% unemployment, the picture comes across as a lot more concerning.

The reason the headline unemployment rate fell from 5.2% to 4.9% was because people stopped looking for work, thus dropping out of the numbers. This is because people who are economically inactive, or no longer looking for work, aren’t included in the headline numbers, with the impact of this increase falling most heavily on younger people.

Consequently, the inactivity rate rose from 20.7% to 21%, (rising to at least 8m people) while the number of workers on payrolls dropped by 11k in March, with job vacancies dropping to their lowest levels in 5 years for the period encompassing Q1.

This is why the focus on a headline number doesn’t always tell the whole story, and why it’s important to also look behind the curtain to see what is being hidden in plain sight. Sadly, a lot of our media seem unable to do this, and as a result we are the poorer for it, with headlines inevitably being spun in a certain way.

On the plus side for the Bank of England, wage growth has continued to slow, with wages excluding bonuses coming in at 3.6%, down from 3.8% in the 3-months to January. Private sector wages also slowed to 3.2% from 3.3% while that in the public sector slowed to 5.2%, from 6%.

While the ongoing health of the labour market is likely to occupy the MPC’s attention over the next few months the committee also has the added problem of the ongoing fallout from the crisis in the Middle East with inflation set to surge in the months ahead, with the March inflation numbers seeing a sharp rise from 3% to 3.3% in data released this morning.

The main driver not surprisingly was in transport, notably fuel prices, which rose at the fastest pace since December 2022 at 4.7%. This rise suggests that we may well have seen the low point in the current price cycle, and as such further rate cuts are unlikely in the near future.

On the plus side the move higher in inflation was much less than that has been seen in Europe, and the US, however that will be of small comfort given that services inflation also saw a sharp increase, rising by 4.5%.

What is more concerning is the sharp rise seen in PPI input inflation during March, which is likely to filter down into the headline numbers in the weeks and months ahead in one of two ways, increased prices or job losses. Either way that’s not good news for the UK economy.  

With the central bank due to meet next week, they will be encouraged by the fact that wages growth has continued to slow, however the labour market will be a cause for concern, along with the prospect that higher levels of inflation could become embedded.

The sharp rise in petrol prices has already manifested itself in higher transport costs, and will in all probability manifest itself in higher food and logistics costs going forward.

Looking forward, the fall in the energy price cap next month is welcome, but there is also a raft of other price increases and tax rises that are likely to manifest themselves in the April numbers, as the new tax year begins.

As a result of this it’s likely that the Bank of England will keep rates on hold when they meet next week, with their biggest problem likely to be anchoring market expectations around the prospect of rate hikes over the rest of the year.

Bank of England governor Andrew Bailey has gone some way to anchoring market expectations about that over the past few days; however, he needs to be much better at presenting the MPC’s deliberations if he doesn’t want a repeat of the last meeting when the central bank’s hawkish shift prompted a sell-off in gilts, and a rushed round of TV interviews to clarify the banks position.