Jobless rate at 25-year low

The government opened a major public relations offensive yesterday after new figures showed that the unemployment rate fell to a 25-year low last month without putting upward pressure on wages.

In a move which wiped out the bad news from Tuesday's poor inflation figures and sparked renewed speculation that interest rates might have peaked, the office for national statistics said average earnings grew by just 4.6% in the latest three months, down from 5.1% previously, despite a drop of 11,900 in the number of people out of work and claiming benefit in June.

The fall in the claimant count took the unemployment level down to 1,109,900, 3.8% of the workforce - the lowest rate since November 1975 when it was 3.7%.

The government's preferred measure of unemployment, the internationally agreed ILO definition, which has wider scope, was also down - by 47,000 in the latest quarter to 1,668,000 - and employment climbed by 126,000 to a record high of 27,909,000.

Flanked by David Blunkett, the education and employment secretary, the prime minister hailed the figures as a milestone for the British economy. "The employment figures mean that there are now over 1m more people in work since we took office just over three years ago," Mr Blair told a Downing Street news conference.

"Those who said our policies could not create, or would destroy jobs, those who predicted recession have been proved wrong ... It is now possible for the first time in a generation to talk about full employment."

The only blot on this latest set of labour market statistics was a continued loss of jobs in manufacturing, where the strong pound has contributed to weak orders and output.

The ONS said manufacturing employment was down by 95,000 over the year, with people being laid off in all industrial sub-sectors apart from wood products. Kate Barker, chief economic adviser at the Confederation of British Industry, said: "The rise in jobs is great news, but this data also shows a weakness in the manufacturing sector where the rate of decline in employment has recently accelerated."

City analysts said the marked fall in average earnings growth, caused by millennium-related payments dropping out of the calculation, took away the only cred ible argument that hawks on the Bank of England's monetary policy committee, such as deputy governor Mervyn King and chief economist John Vickers, had for higher interest rates.

While some warned that the earnings figures should be treated with caution after their recent overhaul, most were satisfied that the danger of a wage-price spiral identified earlier in the year had passed. "A very encouraging set of data, indicating that the inflationary threat from the labour market is receding," said Dharshini David of HSBC.

"Headline earnings growth fell to 4.6% - only just above the maximum the Bank of England views as consistent with the inflation target."

She added that, while the fall in unemployment showed the labour market was continuing to tighten, the absence of an acceleration in wage inflation backed the case that interest rates had peaked at 6%.

Neil Mackinnon, economist at Merrill Lynch, agreed. "While the Bank of England will certainly remain alert over the impact of higher oil prices on the inflation rate, generally the underlying picture is pretty good."

Gilts and interest rate futures gained ground on the perception that interest rates were less likely to rise again.