Expectations of inflation at 2.5 year high

Julian Harris
Follow Julian
INFLATION expectations have risen to their highest level since August 2008, increasing the likelihood that price pressures are seeping through into second round effects.

Britons expect inflation of four per cent over the coming year, according to the latest Bank of England survey released yesterday.

Expectations rose from the 3.9 per cent level, recorded in the previous survey last November. The Bank will be concerned that, on average, people believe inflation is currently at 4.4 per cent – up half a percentage point from November’s survey – 3.9 per cent.

Inflation hit four per cent in January, with the Office for National Statistics (ONS) delaying the announcement of February’s level until Tuesday next week.

Previous Bank of England monetary policy committee member Deanne Julius recently said that February’s rate “could be the shocker” that convinces the Bank to move rates.

Almost two thirds (62 per cent) of respondents expected rates to rise over the next 12 months, compared with 52 per cent in November.

A quarter of people now think that higher interest rates would be “best for the economy,” up from a fifth in November. Just over a third, 34 per cent, think rates should stay where they are.

A positive balance of 17 per cent thought that the Bank was “doing its job to set interest rates to control inflation,” down from 23 per cent last time around.

“This is its lowest level since the last spike in inflation and the financial crisis in 2008-09,” said Chris Crowe of Barclays Capital. “This does suggest that credibility concerns are valid.”

“With the recession over, the renewed dissatisfaction with the Bank probably is mainly attributable to the repeated inflation overshoots,” added Citi’s Michael Saunders.

Long-term expectations will also be a concern for the Bank, with both measures – over two years and five years – increasing by 0.2 per cent since November. In the next 48 months people expect inflation to fall slightly to 3.4 per cent, yet over five years still expect it to remain stubbornly above the Bank’s two per cent target – at 3.5 per cent.