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World economy developments

19 The USA had continued to grow more strongly than earlier expected, and seemed set to continue to do so, although downside risks remained. Recent growth in the euro area had also been stronger than expected in November, and the improvement in business confidence indicators suggested a stronger outlook. Partly against this background, both the Federal Reserve and the ECB had raised interest rates since the Committee's January meeting. This tightening of global monetary conditions had been in line with what had been assumed in the Committee's November projections. 20 Developments in Japan were less clear. Consumption remained very weak and output might even have fallen in the second half of 1999, having done so in Q3. But there were signs of improvement in corporate profitability, which could support investment. That might have contributed to the rise in the Nikkei index over the past few months, although it was noted that price rises had been markedly more pronounced in some stocks than in others. The Committee noted that there were some signs of market concerns about the growth in Japanese government debt which, if fiscal policy were as a result to be constrained, would tend to place more pressure on monetary policy in the absence of a self-sustaining recovery in growth.

Prices and costs

21 Probably reflecting the stronger world economic conjuncture, commodity prices had continued to rise. The annual rate of increase in the Bank's oil-inclusive index had risen to nearly 22% in December; excluding oil, the rate of growth was slightly over 3½%, the highest rate since January 1996. 22 Although input prices were rising strongly, intermediate prices (as measured for example by producer output prices) were increasing more moderately, and RPIX inflation had remained below the 2½% target. 23 The counterpart to the rapid recent rise in manufacturing productivity had been that the twelve month rate of change in manufacturing unit wage costs had fallen in every month between July and November, when the twelve month fall had been 1.3%. However, there was little evidence that measured economy-wide labour productivity growth had risen above levels implied by the past long-run trend of around 2% per year. It was plausible that the Internet would facilitate an increase in the level of productivity that might be spread over several years.