Markit: Long-term inflation not likely

Chris Williamson, lead economist at Markit, commented on the latest unemployment statistics:

“The drop in the rate of growth of average employee earnings is arguably more important than yesterday’s rise in headline inflation as far as the Bank of England’s policy making is concerned. Crucially, the rise in inflation was expected, and can be explained by factors which are to a large extent temporary in nature, while the fact that average earnings are growing at just 1.8% is a surprise and suggests that the longer-term inflation outlook is even more benign than previously expected.

“Clearly, inflation is not feeding through to higher wages, which should help to subdue inflation once the effects of higher VAT, the recent surge in commodity prices and sterling’s depreciation wane in 2012. The weakness of the labour market – claimant unemployment rose by 2,400 in January – continues to result in widespread job insecurity, meaning employees are wary of pushing for higher pay.

“The increase in unemployment also serves to highlight the fragility of UK economy, and further bolsters the case of the doves on the Bank of England’s monetary policy committee, who believe that an early hike in interest rates would threaten the recovery and increase the risk of pushing the economy back into recession.”