Jobless fall and subdued pay growth offer Bank some respite

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A double dose of good news on the economy yesterday showed unemployment falling and pay growth well under control.

Average earnings growth in the three months to November was 4.1 per cent, official data showed, unchanged from the previous month and well below the Bank of England's 4.5 per cent "pain threshold". Stripping out City bonuses, growth was just 3.7 per cent.

Retail price inflation, traditionally used in pay negotiations, surged to a 15-year high of 4.4 per cent in December, and evidence of a wage-price spiral would trigger further interest rate rises. This week, the MPC member Andrew Sentance said that last week's quarter-point hike to 5.25 per cent was aimed partly at anchoring wage-setters' inflation expectations.

"Wage pressures remain well contained, based on these numbers, but the focus of the Bank remains the key January wage settlements which will not impact this series for a couple of months," said Peter Newland, economist at Lehman Brothers. "These numbers are unlikely to impact the Bank's current cautious outlook materially."

More up-to-date figures from the Engineering Employers' Federation showed the average level of manufacturing pay settlements in the three months to December was a benign 3.1 per cent, unchanged from the previous month.

EEF spokesman Mark Swift said that anecdotal evidence on January's settlements had been mixed. "The North-east does not expect pay deals to be inflation-busting and sees little pressure for higher ones, but in the South there might be more pressure because of the higher cost of living and greater concentration of skilled industries," he said.

Meanwhile, the number of people out of work and claiming Jobseeker's Allowance fell by 5,500 to 943,100 in December. The claimant count has now fallen for three straight months, the longest run of declines for two years, raising hopes the labour market has turned a corner after months of job shedding.

The internationally-comparable International Labour Organisation measure also showed an improvement, unemployment falling by 29,000 to 1.674 million in the three months to November. The number of people in work rose by 14,000 to a record 29.029 million, taking the employment rate to 74.6 per cent.

Geoff Dicks, economist at Royal Bank of Scotland, said gloomy predictions that the claimant count would hit one million this year now looked wide of the mark. "The last few months tell us that labour market conditions are improving slightly and so unemployment should keep edging down," he said.