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Bank of England inflation report reveals some worrying trends

For those who love charts, the Bank of England’s monthly inflation report provides much fodder. Charts aside, however, May’s edition makes pretty miserable reading.

Governor Mark Carney downgraded growth forecasts, citing the recent strength of the Pound, a sluggish housing market and weak productivity growth as inhibiting factors. The weak productivity growth is of particular concern and probably reflects the declining growth in investment in the services sector, the backbone of the UK economy.

The reasons cited for the decline in productivity growth make interesting reading.

First, employment growth has been more concentrated in lower skilled jobs that tend to be associated with lower levels of value added per hour i.e productivity.

Second, the process of creative destruction in which weak companies go bust – and new, dynamic companies take their place – has been impeded by low interest rates and forbearance.

Third, weaker investment in employees’ skills may have reduced the pace of innovation. These are all worrying, but if ever there was a good reason to increase interest rates other than too-high inflation, the second is it.

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The views expressed are those of Peter Elston at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content.

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