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Jump in UK labor costs add to sign of growing inflation pressure

A key measure of employers’ labor costs in Britain rose by the most in five years in late 2018, adding to inflation pressures that the Bank of England has said will need to be offset by higher interest rates.

Unit labor costs rose by an annual 3.1 percent in the final three months of 2018, the Office for National Statistics said, up from 2.9 percent in the previous three-month period and the biggest increase since late 2013.

British employers have been increasing their pay for workers at the fastest pace in a decade as they try to hire and retain staff with the unemployment rate at its lowest since the 1970s.

While the strong jobs market is helping households recover some of the spending power they lost after the global financial crisis, the hiring surge has aggravated Britain’s weak growth in productivity which is key for higher pay over the long term.

The ONS said output-per-hour, a measure of productivity, rose by only 0.5 percent in 2018 as a whole, well below the annual average of 2 percent before the financial crisis and half its rate in 2017.

“Our latest figures show a continuation of a decade of weak growth, often referred to as the ‘productivity puzzle’, with labor productivity growth lower over the last decade than at any time in the 20th century,” ONS economist Richard Heys said.

“It has taken the UK a decade to deliver 2 percent growth, which historically was achieved in a single year.”

The BoE has said Britain’s slow productivity growth is likely to add to the case for gradual increases in interest rates, although it has held off from raising borrowing costs while it waits to see if Brexit deals a shock to the economy.

British finance minister Philip Hammond has said Britain’s planned exit from the European Union, which is expected to exert a drag on overall economic growth, underscores the need to tackle the country’s productivity problem.

Reporting by William Schomberg, editing by David Milliken

Source: UK Reuters