UK inflation pressures build as policy maker voices concern

UK labour-market pressure may be mounting, food-price inflation is returning and one Bank of England (BOE) policy maker is starting to voice concern.

A report on Wednesday showed starting salaries for permanent staff rose the fastest in nine months in January. While the central bank said last week that there’s more supply in the labour market than previously envisaged — and that wages will therefore stay relatively subdued — the survey from the Recruitment and Employment Confederation (REC) and IHS Markit indicates signs of building pay pressure. 

That came as Kantar Worldpanel said on Tuesday that UK grocery prices are now rising again after a period of deflation that ran from September 2014 to December 2016. The same day, Kristin Forbes said she’s becoming "uncomfortable” with the BOE’s policy stance given the strength of the economy and the rapid pickup in inflation, and this may push her to vote for an interest-rate increase soon.

The BOE forecasts that inflation — at 1.6 per cent in December — will accelerate to above its 2 per cent target this year, reflecting in part a weaker pound. Forbes, taking a hawkish stance, said that it could strengthen faster than projected, which will then make it "increasingly difficult” to justify tolerating a large overshoot.

Official UK statistics still show food prices are falling on an annual basis, though the rate of decline halved in December to the least in more than two years. That trend could be exacerbated by extreme weather in Spain that’s led to shortages of staples such as lettuce and zucchini in British supermarkets.

"Already for some seasonal food items, where contracts with suppliers tend to be renewed more frequently, prices have begun to pick up,” the BOE said this month. "As such, it is likely that retail food prices more generally will start to respond to pressure from higher sterling import prices over 2017.”

On the labour market, the REC report showed vacancies rising and the availability of staff decreasing, a trend that may worsen because of the decision to leave the European Union. Prime Minister Theresa May has indicated the UK will leave the bloc’s single market in order to gain control over migration.

"Employers are crying out for people,” said REC chief executive Kevin Green. "The government’s decision to prioritize immigration control over the economy in their EU negotiations means that finding candidates will become yet more difficult.”

In its latest forecasts, the BOE cut the estimate of the level that unemployment can fall to without fanning inflation to 4.5 per cent from 5 per cent. Forbes said while the rate probably is below 5 percent, it’s not as low as the MPC’s central estimate. That could mean stronger upward pressure on wages and inflation, though she noted the potential for Brexit to make firms more cautious about raising pay. The UK’s jobless rate is currently 4.8 per cent.

"The MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed,” she said. "In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.”

Source :Times Of Oman