Inflation report: 'Wage growth's our big worry,' says Bank of England

Mark Carney's quarterly inflation report highlighted weak wage growth as its main concern - although growth is still strong.

by Emma Haslett
Last Updated: 26 Sep 2014

And so to Mark Carney’s quarterly Inflation Report, a kind of mini-update on the state of the nation’s finances. Or his expectations for the state of the nation’s finances, anyway.

The Bank’s inflation forecast remained pretty flat: 1.7% in 2015 (down from 1.8%), 1.8% in 2016 (down from 1.9%). But one thing jumped out: as official statistics also published this morning showed, wages aren’t growing in the way they should in a steadily recovering economy, and the Bank of England’s worried about it.

‘Sustained expansion… will ultimately require growth in productivity and real incomes, both of which have disappointed,’ said Carney.

‘Pay growth has been remarkably weak, even as unemployment has fallen rapidly.’

So wage growth will be a significant factor when it comes to deciding on when to raise interest rates, said Carney - as will ‘slack’, the difficult-to-pin-down figure showing spare capacity in the labour market. There is a ‘wide range of views’ among members of the Monetary Policy Committee, which decides on interest rates, as to what exactly that slack is - but ‘our central estimate is now broadly in the region of 1% of GDP’.

‘In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs,’ he said. Although he added that, ‘to be clear, the MPC does not have a particular threshold for wage growth’. Wouldn’t want another Forward Guidance-style shenanigan, now, would we…

But despite all that, there’s no denying the Good Ship Great Britain is now full steam ahead: the MPC increased its growth forecast for 2014 to 3.5%, up from 3.4%; and its figure for 2015 to 3%, from 2.9% originally. Its forecast for unemployment fell, from 6.3% to 5.9%. It’s good news. Those wages just need to keep up.

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