ccording to the Bank of England's monthly survey of corporate decision-makers, business leaders in the UK expect to see an acceleration in inflation and wage growth in the coming years. The survey revealed that the year-ahead expectation for the Consumer Prices Index (CPI) rose to 7.4% in December, up from 7.2% in November. At the same time, wage expectations increased by half a percentage point to 6.3%.
Policymakers at the central bank have expressed concern about the persistence of inflation expectations in the economy after the CPI reached a four-decade high last year. While the Bank of England expects the rate to fall sharply later in 2021, ongoing pressures on prices could result in the bank's 2% target being missed.
The Bank of England's decision-maker panel survey is closely scrutinized by market participants, as it can provide insights into the central bank's next moves on monetary policy. According to Bloomberg Economics, the December survey will make it harder for the Bank of England to slow the pace of tightening in February. While the base case is for a 25-basis-point move, the survey results indicating rising medium-term inflation expectations and wage growth one year ahead increase the odds of a 50-bp hike next month.
Tight Labour Market Easing
The survey also showed that fewer companies reported difficulties in hiring, indicating that the tightness in the labour market, which has contributed to rising wages may be beginning to ease. In December, 71% of firms said they were having trouble recruiting, down from 78% the previous month.
This could signify that the tight labour market is starting to loosen, which could lead to a moderation in wage growth going forward. However, it's worth noting that the survey results still indicate relatively high levels of hiring difficulties, with a significant proportion of companies still struggling to find suitable candidates for open positions.
Impact of Higher Interest Rates
However, the survey revealed that businesses expect higher interest rates to decrease investment and employment over the next year. Firms anticipate cutting investment by 8% and employment by 2% in response to rising rates.
Higher interest rates can impact businesses in several ways. Higher borrowing costs can reduce the profitability of investments, leading companies to scale back on spending. This can result in slower economic growth, and potentially lower employment levels as businesses become more cautious in hiring decisions.
Economic Impact of Rising Inflation and Wage Growth
Rising inflation and wage growth can have a range of economic impacts. Higher wage growth can lead to increased consumption and economic growth, as workers have more disposable income to spend. This creates a virtuous cycle, as increased consumption drives further economic growth and leads to more hiring by businesses.
However, rising prices can erode the value of wages, meaning that workers may not see a real increase in their purchasing power. Higher inflation can also lead to higher business borrowing costs, impacting investment and hiring decisions.
Various factors influence inflation, including rising commodity prices, strong demand, and a tight labour market. If left unchecked, high and sustained levels of inflation can erode confidence in the economy and lead to financial instability.
On the other hand, if inflation is too low, it can lead to economic stagnation and make it more difficult for businesses to achieve growth. This can result in lower hiring and investment, and potentially lead to deflation, which can be challenging to reverse.
Conclusion
The Bank of England's latest survey of corporate decision-makers reveals rising expectations for inflation and wage growth in the UK. While rising wages can lead to increased consumption and economic growth, higher prices can erode the value of wages and lead to higher borrowing costs for businesses. Policymakers at the central bank will closely watch these trends, as they consider the appropriate course of action on monetary policy. Financial market participants will closely watch the survey results as they try to gauge the central bank's next moves on interest rates.
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