Video transcript to follow
Wages in the UK fell in June for the first time since the credit crisis, prompting the Bank of England to half its wage inflation forecast for the year from 2.5% to 1.25%.
In the today’s Quarterly Inflation Report, Bank of England governor Mark Carney hinted that interest rates will not rise soon as wage growth remain subdued.
JP Morgan’s Nicholas Gartside said wage inflation was a ‘desert island indicator’ for interest rates.
“Wage inflation is the single critical indicator to watch t predict rate rises as an acceleration of consumer spending is one of the keys to a sustainable, broad based and enduring economic recovery,” he said.
The Bank reiterated that when the bank rate does begin to rise, the pace of rate increases is expected to be gradual. Data published earlier in the day showed that wages declined for the first time since 2009 and the unemployment rate hit the lowest since 2008. The Office for National Statistics said pay including bonuses for employees was 0.2% lower than a year earlier during three months to June. The ILO jobless rate fell to 6.4% during the same period.
Neil Lovatt, director of financial products at Scottish Friendly, said Carney had again delivered an upbeat forecast of where the economy will be heading in in terms of growth and inflation, while remaining cagey around what impact this might have on any potential interest rate rise.
The 2014 GDP outlook was upgraded to 3.5% from 3.4% and that for next year to 3% from 2.9%. Inflation is close to the 2% target and is projected to remain close to the target in the period ahead, the bank said. Inflation is expected to be around 1.8% in two years' time.