Britain’s economic outlook may have been skewed by bad data – and it could be costing billions. Wage data pored over by the Bank of England’s Monetary Policy Committee (MPC) is set to be revised in the coming weeks – and the implications could be serious.
The nine economists who decide the country’s interest rates – currently at 4.5 per cent – have consistently said they want to see pay rises slow before they can be sure that the inflationary shock brought about by Covid has worked its way out of the system fully. But wage growth remains strong.
Private sector wages have gone from below 5 per cent in early autumn last year to over 6 per cent in the latest release – meaning inflation-busting pay rises. But that pay strength is only true if the Office for National Statistics (ONS) data is correct. Now, the consultancy Oxford Economics has pointed out that data from other surveys shows that pay growth may have been slowing for the past year – and that the ONS wage data may be wrong.
If wage growth is as strong as the ONS has suggested, then you’d struggle to fault the Bank’s decisions so far. But what if the ONS has been wrong? In the latest release of wage data, the ONS said that – in an exception to normal practice – they are going to revise historic data ‘to allow for late and update returns from one business, as part of improving the quality of these estimates’. They added that they ‘anticipate that this may have a small impact at a whole-economy level’.
For the ONS to pre-announce this change, things must be serious. The Bank of England seems to have been briefed too, noting it in the minutes of their March interest rate decision meeting. The Monthly Wages and Salaries Survey questions 9,000 employers on the 25th of every month in order to produce the wage growth data. So for one employer’s data corrections to have the possibility of impacting ‘whole-economy level’ measurements, it must be a pretty large employer. Oxford Economics suggests that employer may be the government, given its size – and the fact that the pay settlements agreed by Rachel Reeves after she took office don’t seem to have been seen in the data yet.
If it’s the government, or perhaps the NHS, submitting flawed data, there are questions to answer. But the more urgent issue is the impact on monetary policy. As the Oxford economists note: ‘The unexpected strengthening in the official measure of pay growth has caused some members of the MPC to question their previous judgements on how persistent inflationary pressures will prove to be. If pay growth strength is subsequently revised away, then data problems could be a key contributor to a policy error’. In other words: interest rates may have been kept higher than they need to be because of dodgy data. That ‘policy error’ – if it turns out to be one – could have cost British households, the government and economy millions if not billions of pounds.
It’s not just the Bank who will be keenly awaiting these revisions to the figures. The Office for Budget Responsibility forecasts for the Spring Statement rely heavily, too, on wage data for their estimates of inflation and GDP growth. Any revisions that have an effect on them could cause problems for the Chancellor.
We don’t actually know what way the revision will go. It could make wage growth over the last year stronger than previously estimated or weaker. But either way seems bad. If the effect is large enough that interest rates have been kept too high, that means mortgage rates are higher than they need to be.
If interest rates have actually been too low – and inflation is worse than thought – then we’ve under-prescribed the monetary policy medicine, risking a longer bout of price rises. Worse still, the OBR said in their report accompanying the Spring Statement on Wednesday: ‘A 0.6 percentage point increase in Bank Rate and gilt yield expectations across the forecast would eliminate current balance headroom.‘ So if interest rates are hiked again, and Rachel Reeves finds herself with that £10 billion headroom wiped out again, she’ll be back at the dispatch box in the autumn almost certainly raising taxes.
Whatever the error turns out to be you might forgive it if it was the only data series the ONS was having difficulties with but it’s just the latest in a long list. On top of the issues with wage data, Oxford Economics highlight:
- Unrepresentative and ‘volatile’ results from the Labour Market Survey because of a collapse in response rates since the pandemic.
- Regular, and massive, revisions to population estimates with knock on effects for other measures.
- The fact that the monthly trade release has had its National Statistic status – a data quality standard – suspended for over ten years.
- A ‘Processing error’ causing delays to services exports and import releases
- And recent warnings that producer price inflation has been underestimated, something that’s going to affect trade and wider economic estimates.
With GDP teetering between growth and contraction by mere fragments of a percentage point, every economic and fiscal decision matters. We simply can’t afford to be getting any of them wrong. In a fragile economy, trust in the data is everything. And right now, that trust is wearing thin.
An ONS spokesperson said:
As noted, we will be incorporating late and updated returns from one employer early in 2025, but cannot yet be more precise about which month’s bulletin these revisions, plus any arising from our regular seasonal adjustment review, will come in. We are not identifying the individual employer concerned, including which sector it falls in.
We believe it is unlikely that this issue will have a material impact on BoE decision making. While we can’t name the organisation concerned it is fair to say they have had problems recently supplying the correct data. Those have now been resolved and we expect to make whatever revisions are necessary to the Average Weekly Earnings statistics as soon as possible.
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