Carney’s warning over low inflation

Mark Carney, Governor of the Bank of England, in Leeds. Picture: Bruce Rollinson.
26 October 2013. — Mark Carney, Governor of the Bank of England, in Leeds. Picture: Bruce Rollinson. 26 October 2013.

Bank of England chief Mark Carney has warned employers not to use near-zero inflation as an excuse to offer staff low wage settlements, as that might derail Britain’s economic recovery.

British wages have only recently started to rise faster than inflation after years of real-term falls.

Many firms will agree 2015 wage deals in coming months amid falling inflation and political uncertainty before national elections in May that are likely to be closely fought.

Carney told British lawmakers that although inflation was just 0.3 percent in January and might turn negative in coming months, the Bank of England (BoE) was working to bring inflation back to its two percent annual target.

“The MPC (Monetary Policy Committee) will conduct policy in order to bring inflation back to target, probably within two years, and that should inform people, particularly as they are forming judgements about appropriate wages,” he said.

The recent rise in earnings has bolstered expectations that Britain’s recovery is finally becoming self-sustaining after the financial crisis of 2007-09.

Average weekly earnings rose by an annual 2.1 percent in the three months to December, outstripping inflation by the biggest amount since April 2008.

The BoE predicted earlier this month that earnings would rise by an annual 3.5 percent in the final quarter of this year, still below their growth rate before the financial crisis.

On Monday, a British government body recommended a three percent rise in the minimum wage, which would take it to £6.70 an hour, the biggest real-term increase since 2007.

Carney said risks from low inflation in Britain related mainly to the labour market, not to deferred consumption as occurred in Japan, where deflation became entrenched.