The Monday note - 19 February 2018

• The FTSE 100 index closed on Friday at 7,294.7, up 202 points on a week earlier, as bargain hunters returned to equities. The ten year Gilt yield stood at 1.57%. 
• US inflation was unchanged at 2.1% in January, although analysts had been expecting a fall. UK inflation also remained steady on a month-on-month comparison, at 3.0% last month. 
• A Bank of England survey suggested that employers are planning average salary increases of 3.1% in 2018, up from 2.6% in 2017. The Bank has been guiding the markets to expect an increase in rates this year. 
• The International Energy Agency said that “extraordinary” growth for American shale producers has placed the US on course to become the world’s largest oil producer. 

Chief Economist comments: 

For some time, the UK unemployment rate has been under 4.5%, something which in theory has huge inflationary potential. Given there will always be some people temporarily between jobs, in an economist’s eyes an unemployment rate below 4.5% is close to saying there is no spare capacity in the labour market. The Bank of England survey shows employers are getting ready to pre-empt the head-hunters by raising wages. This would eventually push up prices in the shops, with the risk of creating a wage-price spiral. Hence all the talk of a base rate hike.