"With house prices continuing to rise ... and tomorrow's labour report set to show ongoing job gains, we continue to look for an early 2015 rate hike"
- James Knightley, ING economist
The majority of analysts predicted British consumer prices would ease their pressure last month; however, report from the Office for National Statistics disappointed market participants, as key measure of inflation remained highly above the target level. The annual pace of growth in consumer prices stood at 2.7% from August, defying forecasts for a tick-down to 2.6%. The ONS also said air fares tumbled 18.7%, a figure significantly lower than the 25.2% drop seen a year ago, having an upward impact on consumer prices. The main downside pressure, however, came from motor fuels. Soon after the data release government bond prices dropped further, lifting yields higher- to a three-week high. These data means the pace of growth in consumer prices is still faster than wage growth, which climbed only 1.1% on average over corresponding period. The Bank of England currently aims at inflation of 2%; however, Mark Carney and other policymakers are holding off raising borrowing costs to adjust inflation rate as unemployment rate is still too high. Under the forward guidance, the BoE is considering not to raise interest rates until the jobless rate hits 7% or even below this level. Another criteria is inflation rate, which according to the BoE, if it does not fall below 2.5% in 18 months to two years, it would force policymakers to make shifts in the policy. The last time CPI fell below the benchmark 2% was November 2009, when inflation stood at 1.9%, indicating it would be hard to push inflation below 2.5%, while the situation in the labour market is improving much faster.
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