Recovery in real wages looks sustainable

The latest labour market data provided further evidence that the recovery in wages now has momentum. Indeed, the headline (three-month average of the annual) growth rate in average weekly earnings picked up to 2.7% in April, the strongest since August 2011. Earnings growth is therefore significantly outpacing CPI inflation, which continues to hover around zero. The pick-up in wage growth partly reflects the significant tightening of the labour market which has occurred over the past eighteen months or so. Nonetheless, since productivity has begun to pick up too - indeed, annual growth in output per hour was 1.3% in Q1 - stronger wage growth is unlikely to prompt the MPC to hike interest rates this year. Indeed, we still think the first rise in Bank Rate will occur in the second quarter of 2016.