SCOTTISH Chambers of Commerce has urged the Bank of England not to raise UK interest rates next month because real wages are falling, after official data showed annual inflation had surged to three per cent.
Liz Cameron, chief executive of Scottish Chambers, warned of the UK economy’s “fragility”.
The rise in annual UK consumer prices index inflation to a five-year high of three per cent in September, from 2.9 per cent in August, was in line with economists’ forecasts. Annual CPI inflation was only 0.3 per cent in May last year, just ahead of the Brexit vote, and the latest reading is the highest since April 2012.
The surge in inflation has caused a renewed annual fall in pay in real terms over recent months.
Ms Cameron said: “The [inflation] figures today continue to highlight the divergence between cost of living and real wages, which characterises the fragility of the UK economy. Speculation continues to increase around the prospect of an interest rates rise in November, yet the inflation figures emphasise the uncertainty this would cause to both Scottish business and the UK economy as a whole.”
She added: In the current climate, while real wages are falling, the MPC (Monetary Policy Committee) should continue to hold steady on interest rates.”
Annual CPI inflation is way above the two per cent target set for the Bank of England by the Treasury.
But the Bank’s Governor, Mark Carney, told MPs yesterday that it still had to balance the desirability of supporting jobs and activity with above-target inflation.
Sterling fell as comments from Mr Carney and fellow MPC members Silvana Tenreyro and Sir Dave Ramsden, the Bank’s deputy governor, fuelled doubts over whether the committee would raise base rates from their record low of 0.25 per cent at its next meeting on November 2.
A Bank statement after the MPC’s September meeting had signalled most members of the nine-strong committee were minded to raise rates in “coming months”.
The pound was, at 4.30pm, trading around $1.3175, down by more than one cent from $1.3285 at its previous close in London.
The euro was higher against the pound. The single currency was trading around 89.19p at 4.30pm, up from 88.9p at the previous close.
The rise in annual inflation last month was fuelled by surging food prices, the figures from the Office for National Statistics show.
There was also a jump in prices in the recreation and culture category, with an upward effect from computer games and package holidays.
Sebastian Burnside, economist at Royal Bank of Scotland, highlighted the fact there had been deflation of 0.1 per cent on the annual CPI measure only about two years ago.
Reflecting on the last two
years, he said: “In that time, a weaker currency and a resurgent
oil price combined to push up the cost of living in the UK. The squeeze on households’ purchasing power is sapping consumer confidence but [the latest] inflation figures may give households something else to worry about - interest rate rises.”
He added: “The Bank of England signalled that it expects to raise
rates in the coming months, possibly as soon as November, if the economy progresses in line with its
forecast. [The latest] rise in inflation [means it] is slightly ahead of
[the] 2.8 per cent that the MPC
forecast back in August, so those calls to raise interest rates will get a little louder.”
However, Mr Burnside highlighted the fact that nominal wage growth was below inflation.
He added: “As price rises outstrip earnings [growth], the squeeze on people’s spending power is already slowing growth. Adding an interest rate rise to that environment could risk a sharper slowdown.”
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