Bank of England stands alone in inflation fight

Looking ahead: Bank boss Andrew Bailey

The Bank of England is finding itself isolated in its fight against inflation.

A day after the Bank raised interest rates to 5.25 per cent, their highest level in 15 years, data from the US showed its economy added 187,000 jobs last month, up slightly from the 185,000 added in June but well below predictions of 200,000.

The declining job numbers have been taken as an encouraging sign the American labour market is cooling, which in turn will put the brakes on inflation.

The Bank of England’s chief economist Huw Pill, meanwhile, warned another surge in food and energy prices could cause the Bank to keep pushing rates higher in the UK. 

Markets have already pencilled in another two hikes before the end of this year. This is in stark contrast to the US, where the Federal Reserve is widely expected to keep rates steady at their current level of 5.25 per cent-5.5 per cent when its rate-setting committee meets next month.

Despite falling numbers of job additions in the US economy, pay growth continued to remain strong for American workers, with hourly earnings rising by a better-than-expected 4.4 per cent year-on-year.

Unemployment also dipped to 3.5 per cent from 3.6 per cent the previous month.

The mixed picture presents a challenge for the US central bank, which has been walking a tightrope by trying to bring down inflation while avoiding recession.

Seema Shah, chief global strategist at Principal Asset Management, said: ‘This jobs report will not clear up the Fed’s dilemma.

‘While the doves will be encouraged by the fall in job gains to below 200,000 for the first time since December 2020, the hawks will be focused on the fact that average hourly earnings are hotter than expected and that the unemployment rate seems steadfastly stuck around the 3.5-3.6 per cent mark.’ 

Despite a growing divergence with its US counterpart, Pill said there was growing evidence the Bank of England’s decision to increase interest rates 14 times since December 2021 was slowing down inflation in the UK.

‘There are increasing signs that the policy actions it’s taken over the last 18 months are working,’ he said.

But he warned the Bank was monitoring prices of food and energy ‘very closely’ and could change tack, particularly if the war in Ukraine once again disturbed energy markets or grain shipments.

‘If we were to see further increases in gas prices or other disruptions, food prices owing to disruptions in the Black Sea or whatever, those types of dynamics would presumably affect things that we’re looking at,’ he said.

This post first appeared on Dailymail.co.uk