JP Morgan AM: The UK's labour supply issues are supporting services inflation

JP Morgan AM: The UK's labour supply issues are supporting services inflation

July 24, 2023

UK Labor force
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In the UK, headline inflation in June was a lower than expected 7.9% year on year, thanks to a negative contribution from petrol and other liquid fuels. However, services prices remained sticky, up 7.2% year on year.

Given the labour intensity of services, high wage growth in the UK is a major factor behind this persistence, with average earnings ex-bonus growing 7.3% year on year in May. Labour markets are tight in many developed economies, but the UK also faces a labour supply issue that is exacerbating this demand-driven tightness: participation has not yet recovered to its pre-pandemic peak, unlike in the eurozone and US. Thus, while we expect headline inflation to ease further, a definitive deceleration in services prices would give us more confidence that the Bank of England is winning its inflation fight.

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