The Bank of England’s inflation worries may already be coming to
fruition.
Brent futures dropped to a seven-year low on Friday, a day after Mark
Carney and the Monetary Policy Committee said low oil prices and subdued wage
gains are increasing the risk that price growth will take longer to pickup than
they currently anticipate. Data this week will shed more light on the outlook,
with the statistics office due to publish reports on consumer prices and pay.
While the Federal Reserve is heading for the first increase in its key
rate since 2006, the BOE’s inflation anxiety indicates it remains some distance
from such a move. In its December policy statement -- when the MPC held the
benchmark at a record-low 0.5 percent -- it warned low headline price growth
may be feeding through to pay settlements.
More insight into the monetary policy outlook will be offered at noon on
Monday, when BOE Deputy Governor for Markets and Banking Minouche Shafik speaks
at the Institute of Directors in London. On Tuesday, U.K. data is forecast to
show that the annual inflation rate was just 0.1 percent in November, far below
the bank’s 2 percent target.
The statistics office may say on Wednesday that basic earnings growth
probably cooled to 2.3 percent in the three months through October from 2.5
percent a month earlier. That would mark the weakest reading since the first
quarter. The report may also show the unemployment rate held at 5.3 percent,
matching September’s reading which was the lowest in more than seven years.
No Hurry
“We’re looking for whether the flattening in wage growth is turning in
to a slowdown,”’ said Chris Hare, an economist at Investec and a former BOE
official. “The weakness in near-term inflation and the questions the MPC raised
on wages shows they aren’t in any hurry to raise rates.”
The question of why prices remain subdued even as the labor market
tightens and the economy expands formed the backdrop for the BOE’s commentary
last week, and was the reason eight of the nine policy makers didn’t want to
tighten policy. The central bank noted that while there may be temporary
volatility in the wage data, “it could also be that lower headline readings of
inflation have acted to limit recent nominal pay growth, despite the tightening
labor market.”
Brent for January settlement dropped as much as 66 cents, or 1.7
percent, to $37.27 a barrel on the London-based ICE Futures Europe exchange. It
slid $1.80 to $37.93 on Friday, the lowest close since December 2008.
U.S. officials are also balancing a strong labor market against feeble
inflation. Fed policy makers meet Dec. 15 and 16 to consider the first increase
the federal funds rate since June 2006. Almost all of the 98 economists in a
Bloomberg News survey predict a quarter-point increase, ending a seven-year era
of near-zero rates.
The MPC is still under no pressure to follow the U.S. Fed,” said Paul
Hollingsworth, an economist at Capital Economics in London. While inflation is
set to accelerate in the coming months, it “should still take a very long time
to return to the 2 percent target,” he said.
Source: BloombergBuiness
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