FXStreet (Delhi) – James Knightley, Senior Economist at ING, suggests that a booming jobs market and surging retail sales mean that the period of low inflation is unlikely to last. Key Quotes “This week’s UK data has provided some really interesting stories. The economy is creating jobs in phenomenal numbers and the number of job vacancies is not far off matching the number of people claiming out of work benefits. This is clearly good news for consumer confidence, which has translated into remarkably strong retail sales growth. Yet, at the same time, inflation is non-existent and wage growth is actually slowing. Of course, the drop in the oil price and the supermarket price war have been clear factors why headline inflation is so low at just 0.1%, but even the core rate is pretty modest at 1.2%YoY.” “This low level of inflation partly explains why wage growth has slowed with the Bank of England stating in last week’s policy decision minutes that it could be that “lower headline readings of inflation have acted to limit recent nominal pay growth, despite the tightening labour market.” Given this general lack of inflation pressures we are likely to see the Bank of England continuing to emphasise that it is in no hurry to raise interest rates. However, we don’t think this situation will last long.” “We are seeing churn in the labour market pick-up as workers increasingly feel confident about seeking higher pay and better job progression with a different employer. Consequently, we are hearing more concern about staff retention, particularly given the shrinking slack in the labour market. These worries were also evident in the recent Deloitte CFO survey. The obvious thing to do in such an environment is to raise pay, which improving productivity should help to facilitate. At the same time the strength in consumer demand is meaning that businesses have improving corporate pricing power, which should allow them more opportunity to pass on higher costs in the form of higher prices.” “In this regard, service sector inflation is currently at 2.4%YoY and we see this rising back towards 3% in coming months. Commodity price falls and lagged effects of sterling strength have heavily depressed goods prices though, which are falling 1.9%YoY – hence headline inflation at just 0.1%YoY. However, while oil will continue to depress inflation in coming months given recent further declines, we struggle to see it falling significantly further from here in an environment of decent economic activity in the US and Europe.” “Moreover, with sterling having weakened 2.5% since mid-November, the disinflationary impulse from currency strength is likely to wane. Consequently, the tightness in the labour market and the strength in consumer demand must raise some thoughts within the Bank of England’s MPC that it is only a matter of time before inflation picks-up. So, while we have to admit the probability of it happening has dipped given recent BoE comments, our house view remains that we will see the first rate rise in 2Q16 with very slow, very modest rate rises thereafter.” For more information, read our latest forex news.