Strong Wage Growth Crucial For BoE to Hike Rates

European markets are poised to open lower for a second day on Wednesday, following a negative lead from Asia although Chinese stocks are holding up quite well despite weaker inflation data overnight.

Prices in China rose by only 1.6% in September, below expectations of 1.8% and way off the People’s Bank of China’s 3% target. The weak inflation data, along with other disappointing releases recently such as yesterday’s trade figure, makes more monetary easing and fiscal stimulus very likely if China is to achieve something close to the 7% growth it targeted at the beginning of the year.

In the U.K., the Bank of England may be forced to reconsider plans to raise interest rates early next year after prices fell by 0.1% last month. Despite being slightly shy of expectations, it wasn’t entirely surprising and is pretty much in line with expectations that inflation will remain around these levels for the rest of this year. It just makes it much harder for the BoE to justify even considering a rate hike at this time.

Today’s labour market data from the U.K. should provide more clarity on the issue, with the wage inflation figures being of particular interest. Earnings growth has been gathering pace and shows that future inflationary pressures do exist. If this starts to taper off at all, it may leave the BoE without a leg to stand on and expectations of no hike until late next year, at the earliest, will grow. As it stands, wage growth is expected to rise slightly again this month, while unemployment is expected to remain at 5.5%.

Later on we’ll get retail sales data from the U.S., which is considered to be one of the most important economic releases that we get from the country every month. Personal spending makes up around 70% of U.S. GDP, of which 25% comes from retail sales, so this data cannot be overlooked. On top of that, it could offer insight into future inflationary pressures because if consumers are hitting the shops and spending more, that could lead to higher prices down the line, not to mention more job creation of higher wages.

Unfortunately, strong consumer spending is something that has been lacking somewhat from this economic recovery in the U.S. despite consumers having more cash as a result of lower oil prices. It seems that in the absence of much wage growth, consumers just aren’t as confident spending this additional disposable income as they otherwise would be. September is expected to be no different, with sales only seen rising by 0.2% and core sales expected to fall by 0.1%.

This just gives Federal Reserve Chair Janet Yellen more of a headache when the central bank meets this month as it looks to raise interest rates as it has repeatedly claimed it will this year.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam