UK inflation rate is down to 2%; how does this affect the jobs market?


New Governor of the Bank of England, Mark Carney would appear to have the golden touch as the UK inflation rate is down to the targeted 2% earlier this month.

According to reports, the UK’s inflation rate, as measured by the Consumer Prices Index, fell to 2% in December, down from 2.1% the month before. This drop has been helped by discounts in the run up to Christmas, with the prices of toys and computer games falling at a faster rate last month than a year ago. The Office for National Statistics has said that the fall was caused primarily by slower increases in the prices of food, and that the rise in prices of both food and non-alcoholic drinks was the smallest it had been since 2006. However, this will have been offset by the slight increase in the cost of fuel.

Whatever, the ins and outs of it, this is a symbolic moment for the Bank of England. It is the first time inflation has been at or below the government-set target of 2% since November 2009. Ever since then, as the economy’s recovery has been bumpy, the Bank has come under fire for seemingly ignoring its mandate.


Wages still lagging behind

Despite this seemingly good news, inflation is still well ahead of average earnings growth, which currently stands at 0.8% excluding bonuses. No doubt most consumers will be hoping that lower inflation will raise the prospect of higher wages, indeed some economists expect the long squeeze on households to end later this year when they predict average pay rises will start exceeding inflation.

All this is good news for the job market. John Allan, national chairman of the Federation of Small Businesses, said December’s fall in CPI inflation was a welcome relief for hard-pressed households and businesses. “With the economy now growing, our members will be pleased that pressures on the cost of doing business are easing,” he said. Ultimately this means that, combined with low interest rates, the climate is one that is conducive to businesses growth.

This would seem to be backed up by the latest unemployment figures, which have recently taken another shock dive to 7.1%. This is just a whisker above the Bank of England’s threshold for considering an interest rate rise.


Unemployment falling but it’s not all good news

The Bank’s forward guidance target of unemployment falling to 7% before it would consider a rate rise looks like being hit far sooner than it expected – and hoped – with the ONS reporting the rate in November stood at 7.1%.

This was down from 7.4% in October and unemployment has plummeted since forward guidance was announced in August, when it stood at 7.8%. Although the Bank has firmly reiterated that hitting 7% will not automatically trigger a rise in the base rate from the rock bottom 0.5% it has sat at for nearly five years, too strong a performance in the jobs market could well lead to increased rates. And any rate rise could well have an adverse effect on the speed of economic recovery and the growth of the jobs market.

So while we’re seeing consistent and definite signs of recovery, the overall feel is still one of cautious optimism.

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