It has been at this rate or higher for five of the last six quarters and is expected to remain around here for at least the next year. The UK was the fastest growing economy in the G7 in 2014, and is expected to be one of the two fastest growing economies in 2015 (along with the US). Despite a moderate fall in last week’s numbers, wage growth has recently been particularly sunny. Over the last three months, the growth in average weekly earnings (excluding bonuses) in the private sector was 3.3pc. When accounting for the low rate of inflation, real spending power has increased at its fastest pace over the last months than has occurred since 2007. The underlying rate of wage growth may be even stronger, as more new hires have been in lower paying sectors and for workers with less experience and qualifications – groups that have had the greatest challenge finding employment. Bank of England estimates suggest this “composition effect” may have caused underlying wage momentum to be understated by up to 1pc recently. These effects could also be reducing measured productivity growth. Tuesday's consumer prices inflation (CPI) release is likely to confirm that inflation has continued to hover around zero. With such low inflation today, it is understandable to want to avoid pre-emptively ending this holiday. A solid recovery is finally here. Increasing interest rates prematurely could moderate companies’ willingness to invest and consumers’ willingness to spend. But unfortunately monetary policy works with lags much longer than a sunburn affects your skin. An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions. Therefore, interest rates will need to be increased well before inflation hits our 2pc target. Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect. But with inflation starting from about zero today, there is no need to act before we are confident that inflation is heading back toward 2pc within about two years as expected. Sterling’s continued appreciation, plus the most recent falls in energy and commodity prices, will keep inflation low for longer. The changes China made last week in its exchange rate regime may also reduce some international prices over the next few months. All of these factors give us a bit more time before inflationary pressures build in the UK. But an extended period of low headline inflation may also obscure growth in underlying cost pressures – a haze which can burn off quickly. Unfortunately it is not possible to predict the exact date when it will be appropriate to raise interest rates. The appropriate time will depend critically on when there is more evidence that inflation is heading towards target as forecast. Some key indicators that I’ll be watching are domestically generated inflation, core inflation, and the pass-through from sterling’s recent appreciation to prices. Measures of core inflation and domestically generated inflation are largely below pre-crisis averages and not yet at levels generally consistent with 2pc inflation. But measures of domestically generated inflation have been stable over the last 18 months – despite very low headline inflation – and are showing signs of increasing. Much of the weakness in core inflation can be explained by low energy prices and sterling’s strength, suggesting that core inflation should begin to recover from current low levels as last year’s sharp fall in energy prices rolls off. Risks from sterling’s recent movements are the hardest to evaluate — but critical. Sterling’s appreciation from early 2013 to mid-2014 did not reduce import prices by as much as has historically occurred, thereby causing less drag to inflation. If this lower degree of pass-through continues, or any pass-through occurs faster than in the past, inflation could recover faster than we forecast. Enjoy the sunshine and low inflation this holiday season. But remember that neither are likely to persist. Stay vigilant against sunburn. I and my colleagues on the MPC will also remain vigilant to changes in the economy in order to support our solid recovery. Just as with all holidays, the current break in inflation will pass quickly. Professor Forbes has been a member of the Monetary Policy Committee since July 2014. In August she was one of eight members that voted to keep Bank Rate at 0.5pc.
A Bank of England official, and member of the monetary policy setting committee, Forbes, has warned against putting off raising interest rates for too long, saying that "maintaining interest rates at the current low levels during an expansion risks creating distortions". This comes as policy-makers in both the UK and the US consider when to raise interest rates, with sentiment seeming to now point to a December rate-hike in the US.