Conflicting employment and inflation data create dilemma for interest rate setters

16th September 2015


Ben Brettell, senior economist at Hargreaves Lansdown, says that conflicting signs from inflation and labour market statistics are creating a quandary for interest-rate setters…

Once again the UK labour market and the inflation numbers are sending conflicting signals on interest rates.

Today’s labour market statistics show that gains in the number of people employed are levelling off as the recovery matures, and that wage growth continues to accelerate as employers find they need to pay more to attract staff. Average pay growth of 2.9% in the three months to July, compared with a year ago represents the strongest growth for six years.

This looks like a clear sign that inflationary pressures are building in the economy, but yesterday’s inflation release tells us this isn’t happening. The headline rate fell to zero, and the core rate, which strips out volatile components like food and energy, stands at only 1.0%. In other words, no evidence of inflationary pressures yet.

It’s therefore difficult to interpret what this means for interest rates. However, today’s wage growth figures do add some weight to the case for higher rates. The markets seem to back this up, with sterling up around two-thirds of a cent against the dollar and almost a cent against the euro since the figures were released.

Meanwhile global risks continue to dominate the agenda. An OECD report released today warns that the global economy is slowing, while Standard and Poor’s has just downgraded Japan’s sovereign debt. All eyes now turn to the Federal Reserve’s interest rate decision tomorrow – on balance I believe recent developments could persuade US rate-setters to wait and see.


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