United Kingdom wages rising faster than prices as squeeze comes to end

Getting warmer Two sunseekers enjoy the weather in Hyde Park London over the weekend

Average weekly earnings have turned positive for the first time in more than a year and United Kingdom employment remains at the highest level since comparable records began in the seventies. Sterling weakened as the data showed wages in the three months to February rose by 2.8 percent, unchanged from the growth rate in the three months to January and below a median forecast of 3.0 percent in a Reuters poll of economists.

'Accelerating wage growth, low and stabilising unemployment - the United Kingdom seems to be approaching full employment'. British households - whose spending is the main driver of the country's economy - have been hit by the double whammy of slow wage growth and a jump in inflation, due mostly to the fall in the value of the pound after the 2016 Brexit vote.

However, markets may be concerned that the drop in unemployment wasn't sufficient to boost overall wages already, which could signal a disconnect between employment levels and pay growth.

Markets and economists appear to be disagreeing over how positive today's United Kingdom wage growth figures are, with the former selling the Pound (GBP) while the latter claims a rate hike may be on the way; the EUR/GBP exchange rate has been able to hold opening levels as a result.

While this is a small rise, it is the first time since January 2017 that real wage growth has turned positive.

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"We think that the MPC will judge that the upside news on pay growth and inflation cancels out the recent soft activity data - particularly since the latter has been distorted by a number of temporary factors of late. The unemployment rate fell, too, and is at its lowest since 1975".

This would undermine the Euro to Pound Sterling (EUR/GBP) exchange rate, with markets buying Sterling on the hopes of higher borrowing costs in May. This saw the Pound-to-Dollar rate quoted 0.04% lower at 1.4336, marking a reversal of an earlier 0.22% gain, while the Pound-to-Euro rate traded 0.11% lower at 1.1567. Since then, inflation has fallen faster than forecast, down from 3% to 2.7%, but the outlook for wage growth has firmed.

The markets are now pricing in an 85% chance of a Bank of England Base Rate rise next month. What is clear however, is that a failure to raise rates in May will be bad for Pound Sterling.

Tuesday's wage data adds fuel to the argument that the Bank of England will likely increase interest rates at the next meeting of its Monetary Policy Committee in the first week of May.

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