UK Inflation Remains Close to Zero

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The FINANCIAL — U.K. annual inflation edged back into positive territory in November but remained near zero for the 10th month in a row, giving the Bank of England ample space to decide when to raise interest rates even if the U.S. Federal Reserve takes action this week, according to Nasdaq.

Prices rose 0.1% year-on year, government statisticians said on December 15, in line with expectations by economists polled by The Wall Street Journal. The rate rose compared with November last year chiefly due to petrol and diesel prices falling at a slower rate, the Office for National Statistics said, which was partially offset by retailers slashing clothing and footwear prices.

Despite this tentative recovery, inflation in Britain and most developed economies remains remarkably low by historical standards, showcasing the struggle of central banks across the world to stoke up prices. The fact that inflation has flat-lined in the U.K. throughout most of 2015 has driven the Bank of England to leave interest rates pegged at their current record-low of 0.5%, even as the British economy recovered from the recession at a brisk pace.

Policymakers usually aim to achieve low and stable inflation and fear the effects of falls in prices, because they tend to benefit lenders and hurt debtors–which can be rushed to deleverage further, putting the brakes on economic activity.

While oil prices have much responsibility in subduing prices internationally, measures of core inflation–which exclude the price of energy, food, alcohol and tobacco–are also depressed. In the U.K., annual core inflation was 1.2% in November, the ONS said Tuesday, up from 1.1% in the previous month but still much below target. A slowdown in emerging markets has also driven analysts to worry about the outlook for the global economy.

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The world’s main central banks are charting increasingly divergent courses. The European Central Bank this month redoubled stimulatory policies for the eurozone, while investors widely expect the U.S. Federal Reserve to raise interest rates this week for the first time in nine years, on the back of strong employment data. However, policymakers remain puzzled by low inflation, which is stuck at less than 1%, well undershooting the Fed’s 2% target.

The Bank of England, which also targets inflation of 2% in the medium term, is looking at a similar picture. Still, rate-setters have signaled that they will leave borrowing costs untouched until well into 2016–and interest rate derivatives suggest markets believe the rise could be left on hold until as late as 2017.

“The relationship between the real economy and inflation has not been as one would have expected,” admitted Minouche Shafik, member of the BOE’s rate-setting body, in a speech in front of businesspeople Monday. “I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in bank rate,” she added.

Indeed, records of the last policy meeting at the Bank of England, where officials voted eight against one in favor of leaving borrowing costs untouched, suggest wages are now one of the main measures for rate-setters to gauge whether cost pressures are building up. Pay growth has slowed in the last few months, after accelerating earlier in the year, suggesting that the BOE has room to decide when to put an end to almost seven years of record-low interest rates.

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