Rising wage growth won’t worry the MPC

While the Monetary Policy Committee (MPC) has stated that it is willing to look through a period of exchange-rate driven above-target inflation, one of its conditions is that there are no significant second-round effects on domestic cost pressures. On the face of it, then, last week’s figures, which showed a pick-up in wage growth alongside faster-than-expected inflation, give possible cause for concern. Nonetheless, with productivity also appearing to be picking up, inflation over Q4 as a whole in line with the MPC’s expectations, and a wider range of metrics of domestic cost pressure remaining subdued, we think that the MPC will welcome the rise in wage growth, as it should help avoid a pronounced slowdown in GDP growth.