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UK inflation pressures build as BoE's Forbes gets worried

London - UK labour-market pressure may be mounting, food-price inflation is returning and one Bank of England (BoE) policy maker is starting to voice concern.

A report on Wednesday showed starting salaries for permanent staff rose the fastest in nine months in January.

While the central bank said last week that there’s more supply in the labour market than previously envisaged - and that wages will therefore stay relatively subdued - the survey from the Recruitment and Employment Confederation and IHS Markit indicates signs of building pay pressure.

That came as Kantar Worldpanel said on Tuesday that UK grocery prices are now rising again after a period of deflation that ran from September 2014 to December 2016. The same day, Kristin Forbes said she’s becoming “uncomfortable” with the BOE’s policy stance given the strength of the economy and the rapid pickup in inflation, and this may push her to vote for an interest-rate increase soon.

The BOE forecasts that inflation - at 1.6% in December - will accelerate to above its 2% target this year, reflecting in part a weaker pound. Forbes, taking a hawkish stance, said that it could strengthen faster than projected, which will then make it “increasingly difficult” to justify tolerating a large overshoot.

In its Agents’ summary of business conditions on Wednesday, the BOE said the pound’s drop since the Brexit vote had pushed up price pressures. While the effect had mainly been on food and fuel so far, this will broaden to other products this year, lifting inflation.

Official UK statistics still show food prices are falling on an annual basis, though the rate of decline halved in December to the least in more than two years. That trend could be exacerbated by extreme weather in Spain that’s led to shortages of staples such as lettuce and zucchini in British supermarkets.

On the labour market, the REC report showed vacancies rising and the availability of staff decreasing, a trend that may worsen because of the decision to leave the European Union.

An annual survey published by the BOE on Wednesday pointed to a “slight rise” in total labour cost growth this year, partly due to difficulties in hiring and holding on to employees. Still, growth in basic pay may slow to 2.2% in 2017 from 2.7%, it said.

“Employers are crying out for people,” said REC chief executive Kevin Green. “The government’s decision to prioritise immigration control over the economy in their EU negotiations means that finding candidates will become yet more difficult.”

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