The UK inflation rate is expected to slow further in August. Price pressures appear to have remained subdued recently, offering the Bank of England more leeway to maneuver in an ultra-loose monetary environment.
UK Consumer Price Index (CPI) inflation fell back well below the official target in July after having suddenly spiked a month before. A continuation of the subdued inflation rate should allow the Bank of England (BoE) to remain relaxed about keeping monetary policy ultra-loose without stoking upwards price pressures as a stronger sterling and slack in the labor market help keep prices in check.
In August, market consensus suggests the rate fell to 1.5%, which would be further below the official 2% target. The British Retail Consortium's (BRC) latest survey adds some support to those expectations, showing overall shop prices were in deflation in August for the sixteenth consecutive month. The Office for National Statistics (ONS) published data on the CPI, producer prices and house prices on Tuesday morning.
The latest Monetary Policy Committee (MPC) meeting minutes said the majority of BoE policymakers said "there remained insufficient evidence of inflationary pressures to justify an immediate increase in Bank Rate."
"In the central projection contained in the August Inflation Report, even with the gradual and limited increases in Bank Rate implied by market rates, inflation was expected to reach the 2% target only at the end of the three-year forecast period," the minutes added.
But for two MPC members, Martin Weale and IanMcCafferty, upward wage pressure, which is a significant variable for the CPI inflation outlook, should pick up soon. The two dissenters, who voted in August for a 25bp rate hike, also said wage growth might lag behind the rest of the labor market data.
If that was true, Weale and McCafferty argued, "wages might not start to rise until spare capacity in the labour market were fully used up … and since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them."
When speaking before the Treasury Select Committee (TSC) on September 10, Weale again showed his hawkish stance towards inflation outlook saying I do feel that inflationary pressures are going to be slightly stronger than the [BoE's] central forecast and that is the reason why I voted in August the way I voted."
To add to the wage inflation conundrum, BoE Governor Mark Carney's comments in the Sunday Times interview in August suggested the central bank would not wait for the wages to pick up in order to begin tightening the policy: "We have to have the confidence that real wages are going to be growing sustainably [before rates go up]. We don’t have to wait for the fact of that turn to do so," Carney said in the interview.
Inflation in Britain remains subdued despite the pace of economic growth being the strongest among the seven most advanced economies. Apart from a downward push from a stronger sterling, price pressures remain subdued due to tentative signs of a global slow-down, especially in the euro zone, where growth slowed to a halt in the second quarter, while the common currency union struggles with significant deflationary pressures.
More detailed information on the vote pattern and the overall sentiment among the MPC members will be revealed in the minutes due on Wednesday this week. Policymakers again voted to keep the base rate unchanged in September.
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