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Yawning gaps in the UK’s labour market data are making it much harder to tell how fast inflationary pressures will recede, Bank of England governor Andrew Bailey said on Thursday as he acknowledged splits over how soon to cut interest rates.
Underlining the difficulties caused by problems in Office for National Statistics data, the BoE said in its quarterly report on the economy that the UK’s workforce could be in a much healthier state than official figures suggested. Bailey himself admitted that he did not know whether labour market inactivity was rising or falling.
The BoE’s monetary policy committee voted by seven to two on Thursday to hold interest rates at a 16-year high of 5.25 per cent, while signalling that it could soon start to cut rates as businesses became less able to pass higher wage bills on to hard-pressed consumers.
But rate setters called attention to “considerable uncertainty” over official jobs data that was making it “more difficult to gauge the underlying state of the labour market”.
Bailey said that there was a “range of views” on how fast or far to loosen policy, with some members more concerned than others over the extent to which wage pressures would continue to drive up services prices.
Monetary policymakers view the strength of the jobs market as critical to the outlook for inflation, because rapid wage growth in areas where workers are scarce has been a big factor fuelling prices in the labour-intensive service sector over the past year.
While this worry is shared by many central banks, a particular concern for the BoE has been an apparent rise in economic inactivity — with record numbers of people saying ill health was stopping them working.
The BoE has previously pointed to this rise in economic inactivity as a key driver of labour shortages that were fuelling wages and services inflation. Prime minister Rishi Sunak has also cited it as justification for a squeeze on eligibility for incapacity and disability benefits.
But these figures are based on the Office for National Statistics’ labour force survey — which are seen as volatile and unreliable, because of a drop in the survey’s response rate.
The ONS said in response to the BoE’s comments that it had taken steps to boost the response rate, which were already leading to a “notable” improvement, although they would “take some time to feed through completely”.
The latest LFS statistics suggest the workforce has barely grown since the end of 2019. Over the past year, the LFS shows the unemployment rate has risen and the rate of employment has drifted downwards, with no improvement in workforce participation.
But other data sources point to much stronger growth in employment, the BoE noted in its monetary policy report, with the workforce some 4 per cent bigger on the latest count than on the eve of the pandemic. Based on these data sources “the participation rate may well be significantly higher than currently estimated”.
Several members of the MPC underlined the degree to which this complicated policy decisions. “We can’t not look at the labour market. On the other hand . . . it’s very hard at the moment to know whether [workforce] participation has gone up or down and that’s challenging,” Bailey said.
Ben Broadbent, BoE deputy governor responsible for monetary analysis, said uncertainty over both the labour force survey and the volatility of separate wage data was forcing policymakers to look at a range of alternative indicators to build a picture of labour market trends.
Dave Ramsden, also a BoE deputy governor, said that the ONS’s ongoing inability to publish full data on flows of workers in and out of jobs “adds to the challenge” and made it “really important” that the problems with the labour force survey were dealt with.
