BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE
BUSINESS OUTLOOK Britain: Inflation Pressures Start to Mount The Bank of England faces a prickly policy dilemma. Amid surging domestic demand, service inflation and hourly earnings are speeding up. But at the same time, manufacturing is getting pounded by sterling's strength, and goods prices aren't rising at all. For now, this unstable combination leaves Britain with a happy result: Moderate 3% growth and tame underlying inflation of 2.2%. The problem is holding it all together. The key may be how much longer sterling, up 12% vs. the euro over the past year, can remain strong amid an ever-widening trade deficit. Despite an improved January balance, the trend continues to worsen. But the wider the deficit, the more vulnerable sterling will become. Export growth has slowed, with volumes falling in recent months, despite improving global demand. Sterling's muscle, along with a booming 8% annual rate of growth in domestic spending in the fourth quarter, is also boosting imports. The widening trade gap subtracted some 5 percentage points from economic growth in the quarter, leaving overall growth at about 3.1%. The split between manufacturing and services remains clear in early 2000. Industrial production in March fell for the third month in a row, which probably cinched the Monetary Policy Committee's Apr. 6 decision to leave its key interest rate unchanged at 6%. But while sterling-influenced goods inflation is running at a record low of near zero in February, service inflation has climbed to a seven-year high of 4.2%. Moreover, with the unemployment rate at a 20-year low of 4%, average earnings are accelerating. In January, they rose 6.4% from a year ago, about three times faster than underlying inflation, suggesting that real wages are growing well in excess of the 2% trend growth in Britain's productivity. While the overall inflation outlook for the rest of the year remains tame, that imbalance is sure to put further upward pressure on prices, as companies attempt to recoup higher costs. The inflation outlook for 2001 would become especially dim should sterling weaken. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Britain: Inflation Pressures Start to Mount CHART: British Pay Growth Is Accelerating INTERACT E-Mail to Business Week Online

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