Wage growth slows as unemployment hits 25-year low

Wage inflation has dropped to the slowest level for four years despite a fall in the number of unemployed to the lowest point since 1975, official figures showed.

Wage inflation has dropped to the slowest level for four years despite a fall in the number of unemployed to the lowest point since 1975, official figures showed.

The benign mixture of full employment and falling wage inflation - both better than forecast - raised the chances that interest rates will stay on hold next month, economists said.

Growth in the average earnings of British workers slowed to 3.9 per cent in July from 4.1 per cent in June. It is the fifth successive monthly fall since it peaked at 6.0 per cent in February and is the lowest since August 1996. The slowdown was achieved despite evidence that the labour market is growing increasingly tight, with unemployment falling, new workers being sucked into the work force and vacancies at high levels.

The Government claimed the figures were part of its "sustained record of achievement" but some experts said recent evidence of rising pay settlements meant average earnings would start to creep up.

The main factor behind falling wage inflation was weak bonus payments, which came in lower than a year ago for the third month running. The Office for National Statistics said there was weak pay growth in the retail sector, which is a major employer in the UK.

Alastair Hatchett, of Incomes Data Services, an independent research firm, said the fall in bonuses was "puzzling". "It does not quite fit with how the labour market looks and the way people use it to get advantages. The bonus culture should be extending itself," he said.

The latest IDS figures show pay settlements creeping up from 3 to 4 per cent. A separate report from analysts IRS Eclipse showed average wage deals rising from 2.5 to 3.1 per cent so far this year. The figures gave ammunition to interest "doves", who focused on the current picture, and the "hawks", who preferred to highlight a medium-term threat from an increasingly tight labour market.

Jonathan Loynes, chief UK economist at Capital Economics, said: "Slowing wages growth alongside low and falling unemployment supports the doves' claims of improved supply-side performance."

But Fraser Coutts, at 4cast.com, said the weak earnings data had simply delayed the next rate hike by one month to November. "The fall in the headline rate buys the Monetary Policy Committee more time," he said.

The detailed figures showed the number of people out of work and claiming benefit in August fell by 18,000 to stand at 1.051 million. The rate fell to 3.6 per cent - the lowest level since December 1979.

The preferred Labour Force Survey jobless total, which includes people not on benefit, fell by 104,000 between May and July to 1,580,000, a rate of 5.3 per cent, down by 0.6 per cent from a year ago and the lowest since records began in 1984. A total of 27.97 million people were in work in the three months to July, an increase of 59,000 on the previous quarter and a record high.