The strength of the UK labour market was revealed in the latest data from the ONS (Office for National Statistics). Job vacancies reached a record high and in the three months to August, the unemployment rate declined to 4.5%.
This was despite over one million people coming off furlough during that period. The strong demand for workers resulted in a 6% increase in average pay, that will fuel fears of further inflationary pressures and the need for an increase in interest rates.
The tightness in the UK labour market has been attributed to the confluence of two factors. First, the imposition of post-Brexit restrictions on the employment of workers from Eastern Europe has been widely cited as causing a shortage of staff in both the agricultural sector and the HGV haulage industry.
Second, it has been suggested that the Covid-19 pandemic has caused many workers to fundamentally reassess their career options, with many workers deciding to leave the leisure and hospitality industries.
INFLATIONARY PRESSURES MOUNT
The recent surge in energy prices has focused investors’ minds on the increasingly pervasive nature of inflationary pressures within the UK economy.
The official narrative has been that inflation is transient, caused by short term bottlenecks in supply chains. However the marked increase in UK wage rates apparent in the latest ONS data, supports the notion that inflation will be higher, last longer and is becoming more entrenched than previously anticipated.
The ONS data will increase pressure on the Bank of England to implement an early increase in interest rates. However in the short term rates are likely to stay on hold until the full impact of the unwinding of the furlough scheme is understood.