By William Schomberg and Sumanta Sen
LONDON (Reuters) – The Bank of England must decide next week how much to raise borrowing costs as it tries to clamp down on Britain’s double interest rate – Figure inflation without adding too much pressure to an economy already close to recession.
Bank of England Governor Andrew Bailey said last week that inflation may be turning around after falling in November and December, but above 10% This is still more than five times the BoE’s 2% target.
Bailey also warned that a shortage of workers could make it harder to bring down inflation by driving strong wage growth and creating too much heat in the economy.
Rates close to peak
BoE is first major central bank in the world to hike rates as it starts pushing up borrowing costs in December 2021, which is expected to announce its tenth consecutive rate hike on Feb. 2. Investors are mostly betting on another half a percentage point – with views increasing to 4.0%, bank rates will soon peak at 4.5%.
CHART: Rate hike drive expected to level off – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d18ea0db.png
Inflation falls, but warning signs remain
UK’s main measure of inflation – the Consumer Price Index – hits 10 Yearly peak 10.1% in October with a slight drop to November and December to .5%.
In its latest forecasts published in November, the Bank of England predicted that CPI would slow to around 5% by the end of the year. That forecast is likely to be lowered in next week’s new forecast following a sharp drop in natural gas prices.
But the BoE may be concerned about how core inflation – which excludes volatile items such as food and energy – has not fallen, and services sector price growth has picked up, which could mean high inflation is becoming entrenched in the economy .
Chart: Inflation Mixed Pack – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d1b7ea05.png
Britons rein in future inflation expectations
Bailey and his colleagues can take some comfort from signs that public expectations of future inflation are falling, which may ease concerns about demand for higher wages. The Bank of England’s closely watched YouGov/Citi measure of inflation expectations over the next five to 10 years has fallen for four consecutive months, but remains higher than before the outbreak.
Graph: Has Inflation Peaked? – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d1e3d2af.png
Labor market inflation picks up
Currently, however, wages excluding bonuses are growing at the fastest pace on record, not during the COVID-19 pandemic, when data was distorted by government support . Average weekly earnings, excluding bonuses, rose at an annual rate of 6.4 percent in the three months to November. But that still isn’t enough to protect wages from the corrosive effects of inflation.
Chart: Labor market inflation heat – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d206e5d9.png
Shrinking UK labor market worries BoE
The BoE sees a shrinking workforce as a worrying indicator of future wage pressures. Other rich economies are also struggling with a shortage of workers, but Britain’s problems have been compounded by post-Brexit restrictions on migrant workers from the European Union. The vacancy rate has fallen in recent months as more people look for work, but remains above pre-pandemic levels.
Graph: Labor market strength – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d2300220.png
UK economy – G7 lagging
UK economy appears to have dodged recession in second half, but economists expect to struggle this year , further hampering its return to pre-pandemic levels. The UK is the only G7 economy that has yet to recover GDP above year-end 1974 levels.
Chart: Lack of confidence – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d25f086a.png
Consumers are still in the doldrums
UK consumers are the main driver of the economy and they don’t seem in the mood to spend big as the currency Inflation keeps making them poorer. The GfK consumer confidence index retreated in January after rising for three straight months and is near the lowest level since the survey began.
Chart: Not out of the woods – https://inew.news/wp-content/uploads/2023/01/localimages/chart.png63ce8d28c6b4c.png