A September post suggested that UK average earnings growth was about to rise significantly, based on the historical relationship with job openings (vacancies). The annual increase in whole-economy average weekly regular earnings was then 0.8%, referring to July, but has since firmed to 1.8% in September. Earnings rose at an annualised rate of 3.0% between the second and third quarters – see first chart.

The acceleration has been driven by the private sector. Private regular earnings grew by 2.3% in the 12 months to September and by 3.1% annualised between the second and third quarters.

The quarterly rise in hourly earnings was larger than in weekly earnings, because average weekly hours worked fell from 32.2 to 32.1 between the latest two quarters.

Monetary policy doves will argue that the earnings pick-up reflects stronger labour productivity: GDP is currently estimated to have risen by 0.7% (not annualised) last quarter, while aggregate hours worked in the economy fell by 0.1%. Productivity, however, was stagnant between the third quarter of 2013 and the second quarter of 2014 – the trend, therefore, is still weak.

The rise in earnings growth is viewed here as the consequence of an increasingly tight labour market. The job openings rate (i.e. vacancies as a percentage of filled and unfilled jobs) rose further in the three months to October and is now close to its 2008 peak – second chart*. Earnings growth has started to pick up nine quarters after the openings rate embarked on a sustained increase in the second quarter of 2012. This is consistent with the average lag at major earnings growth lows in the 1970s and 1980s – see the earlier post for details.

Stronger earnings growth validates the concerns of the two MPC hawks, Ian McCafferty and Martin Weale, but they have no support from the rest of the Committee, judging from the resolutely dovish tone of today’s Inflation Report. The mean forecast of inflation in two years’ time based on unchanged policy was cut to 2.26% from 2.52% in August, signalling that the MPC consensus expects a much later and / or smaller rise in interest rates.

*Quarterly averages except for last data points, which are latest available.