UK public expectations for inflation fall to 16-month low

Britain’s inflation expectations have fallen to a 16-month low, according to data released on Friday, which could strengthen arguments that the Bank of England will leave interest rates at 4% next week.

The latest quarterly survey by the central bank showed that in February, average household expectations regarding the level of inflation next year was 3.9% compared to 4.8% in November last year and is the lowest since November 2021.

When asked about expected inflation in the 12 months after February 2024, respondents on average said it would be 3 percent, compared to 3.4 percent in the previous survey, and the lowest in more than a year.

Ahead of Thursday’s meeting of the Bank of England’s Monetary Policy Committee, which sets interest rate policy, the fall will be welcomed by policymakers, who fear high price expectations could lead to more prolonged inflation.

If people believe that prices will rise rapidly in the future, they are more likely to push for larger wage increases, and businesses will respond by raising prices.

Long-term inflation expectations also eased to 3 percent from a peak of 3.5 percent last May, according to the poll.

Median line chart showing decline in UK household expectations for inflation in February

In an effort to curb high inflation, the MPC has raised rates from 0.1 percent in November 2021 to a 15-year high of 4 percent now for 11 straight meetings. But as the impact of higher borrowing costs became more visible, economists and market participants were divided on what the committee would do on Thursday. Markets are valued with almost equal probability of a 25 percentage point increase or no change.

Martin Beck, chief economic adviser to EY Item Club, a forecasting firm, said the “significant” fall in inflation expectations gave “the MPC another reason to keep interest rates unchanged” at its next meeting.

“Combined with an unexpected slowdown in service sector inflation and rising wages in the latest data, a further fall in energy prices and market turmoil due to banking sector problems abroad, the results of the latest Bank of England survey mean that the reason for raising interest rates is again in search of. getting weaker,” he said.

However, Paul Dales, chief economist at British consultancy Capital Economics, said he expects MPC to raise rates again to 4.25%. As inflation in other countries, including the US and the eurozone, turned out to be tighter than expected, he said, “there is a call to err on the side of caution to make sure the job is done.”

Compared to the last quarterly survey, fewer respondents expected interest rates to continue rising and more believed they would remain unchanged in the coming year.

Public dissatisfaction with the Bank of England’s approach to fighting inflation has also fallen to 30% from a historical peak of 35% last November, but still above the long-term average.