A blunder by the Office for National Statistics (ONS) in which it miscalculated a crucial measure of labour cost inflation could lead to Bank of England policymakers signalling the need for "one or two" more interest rate hikes over the next two years, the man who spotted the error has said.
The ONS issued a correction this morning after it accidentally used the wrong set of data to calculate unit labour cost, the cost of employment per worker.
The corrected version of the data showed unit labour cost grew 2.4 per cent in the second quarter of the year, rather than the 1.6 per cent it reported on Friday.
The Bank of England's quarterly inflation report, published in August, showed staff expected unit labour cost to grow by one per cent in the second quarter. The new figure suggests even stripping out the volatility of the weak pound, inflation is beginning to cost employers more.
"Obviously [the new figure] is much higher than expected," said Simon Ward, UK economist at Janus Henderson, who contacted the ONS on Friday when he spotted the mistake.
"[Bank staff] thought the trend was below two per cent, which supported [the idea] inflation would get back to target in the medium term, but obviously this casts significant doubt on that."
The Bank of England's monetary policy committee (MPC), which sets interest rates, uses the unit labour cost to determine how inflation is affecting the domestic economy.
Bank of England governor Mark Carney had already dropped hints the MPC will hike rates at its November meeting, but Ward said this added fuel to the fire.
It increases the probability they'll move in November. At the margin it increases the probability that they'll signal a need for one or two more hikes over the next two years.
This morning the ONS said it had made the mistake by using the wrong set of data to calculate the figure.
"[The mistake] was due to income data from the second estimate of GDP being using instead of data from quarterly national accounts," it said.
Trade deficit blunder
This is not the first time the ONS has bungled its calculations: back in December it admitted the UK's trade deficit was £6bn wider than it had originally realised, thanks to the way it factored in trade in gold.
“It’s a difficult area of the economy to measure, in fairness to the ONS, but these are big revisions and you get this unease in drawing firm conclusions on the external position of the UK,” Investec economist Philip Shaw said at the time.