King plays down link between falling oil prices and inflation
The Governor of the Bank of England played down hopes yesterday that the recent fall in oil prices would translate into a permanent fall in inflation.
Mervyn King said the Monetary Policy Committee was keeping a "close eye" on wage and cost pressures in the wake of the sharp drop in energy prices.
He said that while the 25 per cent fall in oil prices would help push down inflation in the short term, it might not "persist for long". "A change in oil prices does not in itself tell us where overall inflation is headed," he said.
He also warned analysts against assuming that, in a globalised world, UK inflation was in effect dictated by the price of Chinese imports and oil.
In a speech in Winchester to coincide with the annual meeting of the Bank's court - its board of directors - outside London, the Governor said inflation had been remarkably stable over the past decade. But he said with inflation expectations well-anchored, it mean rising prices in one part of the economy had been balanced by falls elsewhere - and vice versa.
He said the inflationary surge in oil prices to record levels had squeezed household incomes and helped "bear down" on prices of goods and services.
The recent fall in energy prices had made it less likely inflation would exceed 3 per cent, he said. "[But] the anticipated fall in inflation for September may not persist for long," he added.
He said surveys indicated businesses were likely to raise prices, while reports from the Bank's own agents showed half of firms that had seen their margins cut planned to raise their prices. "Given the uncertainties ... we will need to keep our eye on the ball and monitor closely the evolution of wage and cost pressures," he said.
He also highlighted the surge in broad money growth to a 16-year high, but said greater labour market participation by immigrants and older people could weaken wage pressures.
His comments came as a labour market survey showed that salaries for permanent staff were rising at their fastest pace for more than five years.
The Recruitment and Employment Confederation said continued robust demand for staff had pushed pay inflation to its highest level since February 2001.
A separate survey showed that retail sales growth remained strong in September. The British Retail Consortium said like-for-like sales were up 2.4 per cent on the year in September, down from an annual rate of 2.5 per cent in August.
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