Green and pleasant land
Britain’s economy seems to have reached the sunny uplands. How long the halcyon days last is another question.
Average earnings rose faster than prices for the third month in a row in November, official statistics showed on Jan. 21. This is good news for consumers, whose pay packet will stretch a bit further. Even better, the unemployment rate fell to 5.8 percent.
For borrowers, the brightest ray came from the minutes of the January meeting of the Bank of England’s Monetary Policy Committee. For the previous five months, two of the nine members had been worried enough about a return of inflation to vote for an immediate rate increase. This time, the vote to leave policy rates at record lows was unanimous.
The dwindling threat of rate rises led investors to sell the pound and buy UK bonds and stocks. The first UK rate hike is now expected in 18 months’ time, compared with around 15 months only a few days ago.
This beatific picture is framed by ultra-low inflation rates. Consumer prices rose at an annual rate of 0.5 percent in December, the joint lowest rate since this index started in 1996. And the BoE minutes say there is a roughly even chance of it temporarily dipping below zero at some point in the first half of 2015.
This could be too much of a good thing. Persistent price stagnation is likely to lead to persistent wage stagnation. Roughly two-fifths of pay settlements are due to be agreed in April, when inflation is expected to be around zero, the BoE minutes say. “Noflation” could deter employers from awarding, and employees from demanding, much in the way of pay rises.
Faltering wage growth would only make it harder for the BoE to lift inflation back towards its 2 percent goal, especially if energy and commodity prices remain depressed. The central bank is well aware. The minutes say that sustained pay growth, “at rates materially higher than in recent years” is required to be consistent with its price goal.
The British should enjoy the economic sunshine while it lasts. A disinflationary shadow lurks.