• Unemployment rate sees surprise rise…

• …and employment drops

• Pay growth picks up again, but MPC should be reassured by positive signs for productivity

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

"Having become accustomed to persistent declines in the unemployment rate, the labour market data for the three months to May came as something of a shock. The number of people out of work increased by 15,000 leading to the first quarterly rise in unemployment since March 2013. Moreover, employment dropped by 67,000, having risen consistently in each quarter since April 2013 mainly due to a fall in part-time and self-employment. But the number of full-time employees rose, indicating a further shift towards normality in the labour market.

"A softening in the demand for workers contrasted with a further pick up in pay growth. While May saw annual growth in average earnings drop from 2.7% to 2.6%, the three-month annual average rose from 2.7% to 3.2%, a five-year high. With annual CPI inflation averaging zero over the same period, real pay also rose by 3.2%, a seven-year high and well above the pre-financial crisis norm of around 2.5%.

Commuting (PD)"So the pay numbers potentially provide grist to the mill of Mark Carney's recent comments at the Treasury Select Committee where he noted that the point at which interest rates may begin to rise is moving closer. But a further pick-up in pay growth need not be inconsistent with the MPC's 2% inflation target, given further signs that productivity is finally recovering.

"Moreover, the recent cooling in the pace of labour market improvement should feed over time into a slower recovery in pay. Certainly, the likelihood of a rebound in inflation towards the end of the year will erode growth in real earnings. So while prospects for the labour market remain bright, workers may want to make hay while the sun shines."

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