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Pound recovers ground as wages close inflation gap

Pound recovers ground as wages close inflation gap

The pound has recovered some of the ground lost to the dollar yesterday, as UK wage growth figures came in stronger than expected.

Wages grew 2.1% year-on-year in the three months to the end of June, ahead of the 2% growth anticipated. That marks a rise from May's 2% figure and the 1.8% growth registered in April.

Wages have closed some of the gap with inflation, but continue to grow at a slower pace than price rises, with the consumer prices index rising 2.6% in June and July.

The news boosted the pound, which edged 0.2% higher against the dollar to $1.29, reversing some of yesterday's losses sparked by lower-than-expected inflation figures.

The unemployment rate meanwhile fell to 4.4% in the second quarter, its lowest level since 1975.

Economists welcomed the uptick in earnings growth but said it was unlikely to prove the precursor to an acceleration of growth.

'The tightness of the labour market is still not translating into the sort of wage growth that we would normally be seeing with such few people out of work,' said Chris Williamson, chief business economist at IHS Markit.

'It's therefore hard to make the case that wage growth will spike higher, warranting higher interest rates, any time soon.'

Hargreaves Lansdown senior economist Ben Brettell said that a 'fundamental shift' in the labour market had broken the links between employment levels and wages.

'The cause seems to be a lack of underlying inflationary pressure, combined with technological developments and global competition which has weakened the bargaining power of the worker.

'There is some cause for optimism that the squeeze on household finances could come to an end later this year, though ultimately the light at the end of the tunnel could be provided by falling inflation rather than rising wages.'

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