20 Jan 2011 3:16 AM
Figures out today show UK unemployment rose by 49,000 to 2.5 million in the three months to the end of November. One in five 16 to 24-year-olds are now out of work, after a rise of 32,000 to 951,000 without jobs, the highest figure since records began in 1992. Other data from the ONS showed that average earnings had risen by 2.1% in the year to November.
Yesterday, sterling extended gains, hitting an eight-week high versus the dollar after a surge in consumer price inflation fuelled expectations that UK interest rates may need to rise soon. Rising oil prices drove annual CPI growth up far more than expected in December to an eight-month high of 3.7 percent, data showed, well above the Bank of England's 2.0 percent target. Sterling was boosted as the figures added more fuel to speculation that the UK central bank may have to raise rates -- which have been chained at a record low 0.5 percent -- as early as May. UK money markets, which last week priced in around a 50 percent chance of a UK rate hike in May, were pricing in a 75 percent chance of a move by then after the data. Higher inflation deepens the dilemma of the BoE, as a rate rise in the near term may choke off the country's economic recovery, particularly as the impact of government austerity measures is expected to kick in this year.
Many analysts argue that the BoE is unlikely to raise rates in the coming months, which could further worsen its market credibility as price risks ratchet higher. The central bank suggested it would stay put on rates despite rising prices, with Paul Fisher, the BoE's executive director for markets, saying in a newspaper interview that the bank must not get too concerned about short-term inflation.
The recent VAT rise from 17.5% to 20% could further fuel inflation, which has now remained above the 2% target by one percentage point or more for 13 months. The Bank should stand firm against temporary pressures such as the VAT rise, it says.
In its 2011 UK economic review, it says it expects GDP growth this year and next of just 1.5%. However, the more-optimistic Item Club forec|