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Elusive wage inflation

Back in 1958, that hero, Bill Phillips, pointed out that there was an inverse relationship between unemployment and wage inflation, with lower unemployment leading to higher wage growth; this is the famous Phillips curve. If this relationship still holds, there's an obvious case for raising interest rates. The unemployment rate is now lower than at any time since 1975, which should trigger rising wage inflation and hence higher price inflation. If the Bank of England is to keep inflation at its 2 per cent target, interest rates will therefore have to rise.

Of course, the official unemployment rate is an imperfect measure. But fancier estimates tell the same story. The OBR has estimated that the economy was operating above full capacity at the end of last year, and the Bank of England believes that "spare capacity is being eroded". That's why three MPC members - Kristin Forbes, Ian McCafferty and Michael Saunders - recently voted to raise rates.

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