Interest rates: record employment, inflation up – but rates won’t move yet

Weak inflation is the key case against raising interest rates. A strong labour market and low unemployment are typically associated with building price pressures that should continue to push inflation higher. But there are flies in the ointment.

Latest official figures published today reveal that UK unemployment fell slightly to 5.1 per cent in the three months to November, the lowest rate since the same period in 2006, “long before the financial crisis”, notes the Financial Times. The employment rate surged to 74 per cent, the highest since records began, with most of the growth coming from “traditional” full-time employee roles.

This comes on the day after inflation was revealed to have risen to an 11-month high. A steep rise in air fares in December relative to the same month in 2014 and a smaller fall in oil prices compared to the previous year pushed prices up 0.2 per cent year-on-year, slightly above expectations and the first time in 2015 the rate had exceeded 0.1 per cent.

In the employment data is the fact that wage rises again underwhelmed, continuing a down trend from the three per cent hit in the middle of last year to two per cent and further undermining inflationary pressures. On inflation more directly, there is the fact that price rises are still low – 2015 saw the lowest average rate for 50 years – and that the latest slump in oil will act as a further drag.

Things could still turn this year.

One forecast this week claimed UK growth will actually accelerate this year and come in ahead of forecast, in particular as a result of increased consumer spending. Ernst & Young’s Item Club reckoned the decent rise in real incomes that is being boosted by low inflation will feed through into higher outlay by austerity fatigued shoppers.

What is clear, though, is that rate-setters are prepared to wait and see if this materialises for some time more yet.

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