Inflation Report, November 2015

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Global economic and financial developments

UK-weighted world GDP rose at a slightly slower pace in 2015 Q2 than projected in the August Report. The near-term outlook is also weaker than in August, reflecting developments in emerging economies. In part reflecting that weaker outlook, global equity prices are lower and oil prices have fallen by 14% since the August Report. In the United Kingdom, market prices imply a more gradual pace of Bank Rate rises than in August. The sterling ERI is around 2% lower.

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Demand and output

Output growth was 0.5% in Q3, having fallen back since mid-2014. While weak global growth and the past appreciation in sterling will weigh on net trade, private sector domestic demand growth is projected to remain resilient, with support from the past easing in credit conditions and continued real income growth.

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Supply and the labour market

Total hours worked rose modestly in the three months to August, as growth in employment only slightly outweighed a fall in average hours worked. Other indicators, however, suggest that labour demand growth remains robust, and the unemployment rate has fallen slightly. Both wage and productivity growth have picked up since last year, but remain below pre-crisis rates.

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Costs and prices

CPI inflation was -0.1% in September. The current low level of inflation can largely be accounted for by lower energy, food and other imported goods prices, although it also reflects muted domestic cost growth. Inflation is projected to pick up over coming months, but less quickly than projected in August. Unit labour cost growth rose to 1.8% in Q2 and is projected to strengthen further, consistent with inflation rising back to the 2% target in around two years. Inflation expectations remain broadly consistent with the MPC’s 2% target.

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Prospects for inflation

CPI inflation has remained close to zero. GDP growth has slowed over the past year to around its past average rate. A weaker global backdrop together with falls in the prices of risky assets are weighing on the outlook for UK growth, but they are counterbalanced by support from falls in market interest rates and commodity prices. Conditioned on a very gently rising path for Bank Rate, the MPC judges that four-quarter growth is likely to remain around current rates and the slack remaining in the economy is likely to be absorbed. Recent falls in oil and other commodity prices mean that inflation is likely to remain lower than previously expected until late 2017 but, on the conditioning path for Bank Rate, the MPC’s best collective judgement is that CPI inflation will return to the 2% target in around two years and rise above it thereafter.

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