Upcoming UK macro data should make the overall picture on the level of slack clearer. If strong commercial wage growth data translate into stronger official figures, and Q2 growth shows the economy kept its momentum, then we could expect further upward pressure on sterling stemming from expectations of an earlier rate hike from the BoE.
"An analysis of inflation without the labor market would be akin to a performance of Hamlet without the Prince," Bank of England (BoE) policymaker Martin Weale said in a speech in June, referring to the implications of UK labor market slack on the inflation outlook and the consequent path of monetary policy.
But the latest labor data again increased uncertainty about the level of spare capacity and how it may affect the upcoming monetary policy decisions.
The jobless rate in Britain fell again in May to 6.5% and approached the upper end of the BoE's latest estimate of the equilibrium rate, while wage growth slowed down significantly below the level of the inflation rate.
According to some economists, May's meagre earnings growth could have been a one-off event, caused by earlier bonus payments this year. But Mark Beatson, chief economist at the CIPD, argued after the jobs data release on Wednesday that even though the May growth plunge was a one-off event, this "reminds us that there are no signs of pay pressures building up in the official figures."
Beatson also said that it was very difficult to see where the pick-up in wages growth would come from, given weak productivity growth, government welfare reforms, and the availability of EU migrants to the UK labor market.
Speaking in Belfast in June, even Martin Weale, who is considered as one of the most hawkish among the nine-member MPC, said that "should wage growth fail to revive, that will, on its own, tip the scales further in favor of maintaining a strong monetary stimulus."
Seeing such weak wage growth data could therefore reinforce Weale's comments despite the majority of BoE watchers and economists increasing their bets on an earlier rate hike, as soon as November this year.
Commenting on the labor figures release, IHS Global Insight's chief economist Howard Archer argued that "the further marked fall in unemployment points to a still rapidly tightening labor market and also maintains concerns over UK productivity, thereby seemingly boosting the case for an early raising of interest rates by the Bank of England."
But Archer also pointed out that "ongoing very low earnings growth suggests that there is still an appreciable amount of labor market slack with little pressure on inflation coming from pay."
A clear reflection of weak wage growth was seen on Wednesday after sterling dipped following the data release, with markets reacting to suggestions the BoE has still enough of a leeway to keep monetary policy ultra loose for longer without generating any significant inflationary pressures.
Berenberg's chief UK economist and a former BoE official Robert Wood argued "the labor market is tightening quickly in response to strong UK growth” while a sudden plunge in wage growth “is unlikely to last much longer given the other labor market trends."
The official data showing weak earnings growth goes contrary to what some commercial data had been indicating. According to the latest Report on Jobs by the Recruitment and Employment Confederation (REC) and KPMG, permanent salaries rose during June at a survey record rate, rising for twenty-six months in a row. The REC report also showed wages rose on the back of a record fall in permanent staff availability.
Therefore, if a sharp fall in wage growth in quarter to May was only a statistical blip and a significantly stronger commercial data begin to translate into stronger official figures, then we may expect the first vote for the rate hike as soon as in August or September, after the Inflation Report.
Arguments for a sooner tightening should also be reinforced by the upcoming data on Q2 GDP and other commercial business surveys for July and August, given they show that UK economic growth managed to keep its momentum in the second and third quarter.