Bank of England’s Bailey: Inflation Figures No Game-changer

Above: Governor Andrew Bailey. Image copyright Pound Sterling Live, courtesy of Parliament.tv

Bank of England Governor Andrew Bailey has responded to January’s inflation data surprise by warning that the numbers do not change the outlook presented at the Bank’s last policy meeting.

Speaking in an appearance before members of the House of Lords, Bailey said the news inflation remained static at 4.0% in January was “welcome”. At 4.0% year-on-year, UK inflation undershot the Bank’s forecast of 4.1% made at the last Monetary Policy Committee meeting.

But, Bailey maintained the Bank’s recent guidance that interest rates would remain at current levels for some time, warning services inflation – which rose from 6.4% to 6.5% – is not compatible with the Bank’s 2.0% target.

Bailey also said the Bank wants to see more evidence that pay growth was easing. The UK reported average earnings, with bonuses included, fell to 5.8% from 6.7% year-on-year in the three months to December.

Economists say pay awards are running at levels consistent with inflation, staying above the Bank’s 2.0% target for some time.

“Underlying inflationary pressures remain elevated – and well above the 2% target,” says the National Institute of Economic and Social Research (NIESR), in a post-inflation release analysis.

The NIESR’s measure of underlying inflation, which excludes 5% of the highest and lowest price changes to eliminate volatility and separate the signal from the ‘noise’, fell to 4.9% in January from 5.5% in December.

At the same time, core CPI remained unchanged at 5.1% and services inflation rose marginally from 6.4% in December to 6.5% in January.

“Today’s downward surprise may signal that inflation is set to fall even faster than we projected. However, this is unclear given today’s core inflation figure remaining unchanged at 5.1% and services inflation rising to 6.5% from 6.4% in December, which indicates that underlying inflationary pressures remain elevated,” says Paula Bejarano Carbo, an economist at the NIESR.

Last week, one of the Bank’s most ‘hawkish’ members, Catherine Mann, said she was not convinced the current disinflation trend would continue.

She cited a “constellation” of factors that point to somewhat stronger, even if not strong, demand going forward.

“I see risks of continued inflation momentum and embedded persistence,” said Mann in a speech. “I am not convinced that the near-term deceleration in headline inflation will continue.”