The economy is moving broadly in line with the Bank of England’s expectations following the release of crucial data on inflation and the labour market, Andrew Bailey said today.
Speaking in the House of Lords’ Economic Affairs Committee, Bailey acknowledged that the latest inflation figures, published this morning, were “good news”.
Inflation remained at four per cent in January, whereas the Bank of England had expected a slight uptick to 4.1 per cent. City economists had also expected an increase, reflecting higher energy prices and the impact of base effects.
Bailey noted that the upward pressures were present, but “there were some more other things going on which were putting more downward pressure on inflation than we expected so that’s good news,” he said.
The downward movement was “pretty broad based – a bit of it in energy, some in food but also some of in services as well, so that’s quite encouraging,” he said.
Services inflation is one of the main gauges of domestically generated inflationary pressures. Although the annual rate of services inflation increased slightly to 6.5 per cent due to base effects, monthly prices fell 0.8 per cent.
In all, Bailey said the figures leave the Bank “broadly where we thought we were going to be“.
Although the Bank left interest rates on hold for a fourth consecutive meeting, policymakers have opened the door to cutting rates later this year if price pressures continue to abate.
The Bank is forecasting that inflation will touch two per cent in the spring before picking up slightly later in the year.
However, markets were concerned by figures released yesterday on the labour market, that showed that wage growth had come in ahead of expectations in the final quarter of last year.
Annual regular pay growth fell to 6.2 per cent in the final quarter of last year, down from 6.6 per cent but higher than the Bank’s prediction of a fall to 6.0 per cent. Unemployment meanwhile was 3.8 per cent, lower than previously expected.
Following the news, traders pared bets that the Bank would start cutting rates in May out of fear that a tight labour market would fuel persistent wage growth.
Bailey did not seem too concerned by the slight overshoot. “Yesterday’s earnings numbers were billed as slightly disappointing,” he said. “Actually of course there was quite a marked reduction in pay growth, just not quite as far as we thought,” he continued.
“We’re seeing pay coming down, but we need to see more evidence of that to be sure we’re on track to two per cent sustainably,” he concluded.