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Inflation expectations higher

13/12/2007

Britain's inflation expectations rose to an eight-year high in November, according to the latest Bank of England survey.

Analysts say public expectations of higher inflation could undermine the ability of the UK central bank to implement a further interest rate cut in the near future.

Consumers questioned in the poll said they believed inflation was currently running at an average of 3.2 per cent, the highest level suggested since the survey began in 1999 and significantly higher than the Bank of England's official two per cent target.

The most recent official data confirmed inflation actually reached 2.1 per cent in October, the highest level in four months.

But despite warning last week that upside risks to inflation remained, with oil and food prices having risen significantly of late, the Bank of England opted to cut the UK's benchmark interest rate by a quarter-point to 5.5 per cent - amid signs of an economic slowdown in the wake of the ongoing global credit crunch.

However expectations of higher prices are likely to concern monetary policymakers, who regard containing such expectations as key to curbing consumer price inflation over the medium term.

The Bank of England's survey of 2,054 people, conducted by polling firm GfK NOP, found consumers also expect prices to rise above the official inflation rate over the next year.

Members of the public anticipate inflation will reach three per cent over the coming 12 months, up from the expected rate of 2.7 per cent suggested by consumers in August.

Commenting on the survey results, Global Insight chief economist Howard Archer said: "Increased inflation expectations highlights the fact that a further Bank of England interest rate cut as soon as February is far from a 'gimme'.

"Much will depend on how resilient the economy is over the coming months, how consumer price inflation develops and whether or not pay shows signs of spiking up in the early 2008 wage rounds," he explained.