Britain's labour market may have less slack than some indicators suggest, increasing the risk of persistent inflation from the latest energy shock, Bank of England policymaker Megan Greene said on Oct. 20.
That challenges a premise underpinning monetary policy, Greene said in her speech, “Learning about earnings: Can we rely on labour market slack to mitigate the latest supply shock?”, published by the central bank that day. Economic resilience suggests less spare capacity than some labour indicators imply, she said.
Wholesale gas prices were close to triple their level at the start of the year, while oil spot prices were just under double early-January levels, Greene said. Costly workarounds for disrupted Middle Eastern supplies had kept energy prices high, she said.
Greene examined recent wage developments, forecasting experience since the global financial crisis and broader measures of labour market slack. She said different pay indicators gave conflicting signals because their coverage, frequency, composition and methods differed.
The central bank's wage forecasts generally exceeded subsequent outcomes before the pandemic, then systematically underestimated wage growth after it, she said. That pattern could reflect structural changes in the labour market during the pandemic, Greene said.
Possible explanations included weaker matching between workers and jobs, lower job-search intensity, labour hoarding, recruitment difficulties and reduced participation, she said. Workers' efforts to protect real wages following the 2022 energy shock could also explain stronger pay growth, she said.
Wage growth had generally slowed since 2023, suggesting those pressures were unwinding, though they might not have disappeared entirely, Greene said.
The central bank focuses on private-sector regular average weekly earnings because private pay feeds more directly into consumer prices and responds more closely to labour conditions, she said. Excluding bonuses also removes a volatile component, Greene said.
The Office for National Statistics' earnings measure draws on a survey of about 9,000 businesses covering roughly 15 million employees across Great Britain, Greene said. It arrives with a two-month lag and surveys only businesses employing at least 20 people, although adjustments account for smaller firms, she said.
Payroll data published by the statistics office with HM Revenue and Customs provide a broader administrative alternative, Greene said. However, early median estimates often face heavy revisions, and the inclusion of bonuses and one-off payments complicates comparisons, she said.
Slack could weaken workers' bargaining power and limit pay increases, but wage-setting remained a possible route for the energy shock to become embedded in inflation, Greene said. She added that productivity-driven wage increases need not generate comparable inflation pressure.
Clearer evidence might not arrive until early 2027, with the central bank's pay survey due in February and most settlements agreed in January and April, Greene said. Waiting for that evidence before tightening policy would be too late because policy affects activity and inflation with a lag, she said.
