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Inflation expectations "uncomfortably high"

13/09/2007

Expectations of future inflation among UK consumers remain "uncomfortably high", analysts have warned in the wake of new figures.

British consumers expect prices to rise by around 2.7 per cent over the coming year, according to the Bank of England's latest quarterly survey of public attitudes to inflation.

The poll, conducted in August, shows that consumer inflation expectations for the next 12 months remain as high as they did in May and also match the highest level recorded by the survey since it began in 1999.

Assumptions that prices will rise at such a level come despite the latest official data showing that inflation actually dipped to 1.9 per cent in July, when it fell below the Bank of England's two per cent target for the first time in months.

The survey of over 2,050 people aged 15 and over also found that respondents thought the current rate of inflation was 2.8 per cent.

Analysts said that the figures would disappoint the Bank of England, which closely monitors consumer spending to determine whether it is fuelling inflation.

However Global Insight chief economist Howard Archer stressed that the central bank was still likely to bring interest rates down eventually, in the wake of the ongoing global credit crunch and a predicted slowing of UK economic growth over the coming months.

Monetary policymakers last week announced their decision to keep the UK's benchmark interest rate on hold at 5.75 per cent, but Mr Archer added that they would nonetheless be concerned about lowering the cost of borrowing too early.

"Ongoing relatively elevated inflation expectations highlight the fact that there are still significant medium-term inflation risks, and reinforce our belief that the Bank of England will be very wary about any early trimming of interest rates," he explained.