Wage inflation at two-year high, jobless at record low, says ONS

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The Independent Online

Wage inflation has hit a two-year high, according to official figures published just hours after the Governor of the Bank of England warned the economy was running out of spare capacity.

Wage inflation has hit a two-year high, according to official figures published just hours after the Governor of the Bank of England warned the economy was running out of spare capacity.

Yesterday's upbeat labour market report also showed unemployment falling to a record low, vacancies rising and redundancy rates dipping.

Annual growth in average earnings excluding bonuses rose to 4.3 per cent in August, the largest since April 2002, the Office for National Statistics said. The main driver was the private sector, where pay deals also hit a two-year high of 4.3 per cent, taking it above the average for the public sector for the first time since September 2002.

Richard Jeffrey, the chief economist at Bridgewell Securities, said: "This escalation in labour costs is more threatening than is generally recognised and reflects a significant rise in inflationary pressure."

The ONS said the official measure of unemployment fell 51,000 over the three months to 1.39 million, taking the rate to a record low of 4.7 per cent.

The number of vacancies jumped to a three-year high of 662,800, while redundancies fell to the lowest level since records began in 1995. Despite the large fall in the jobless total, the growth in employment was just 10,000, implying more people were dropping out of the labour market.

The ONS said the number of economically inactive - people of working age unable or unwilling to work - had hit a new all-time high as hours worked hit a 14-year low.

John Philpott, the chief economist of the Chartered Institute of Purchasing and Supply, said the jobs market was "at a virtual standstill". He said: "Slower growth in employment, a dip in the employment rate and a drop in hours worked suggests weaker demand for staff." But he warned that the shrinking pool of workers would keep pay under pressure.

Most City analysts said the mixed message from the figures would allow the Monetary Policy Committee to keep its powder dry for the rest of the year.

But several said they flagged up concerns over a longer-term threat to the Bank's inflation target. Ciaran Barr, the chief UK economist at Deutsche Bank, said: "While it does not herald the need for an imminent rate hike, it does put the Governor's recent comments into context and illustrates that not all economic news is doveish."

On Tuesday, Mervyn King, the Bank's Governor, said there were "signs of cost pressures" in a speech seen as signalling rates might not yet have peaked.

Figures from Savills Private Finance show yields on interest rate swaps - the price at which mortgage lenders borrow - have fallen below 5 per cent for the first time since March for both two- and three-year deals.

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