Bank of England: Inflation Expectations Stubbornly Elevated

Image © Bank of England

Inflation expectations are back at nine-year highs according to a Bank of England survey, maintaining pressure on the central bank to pursue higher interest rates.

According to the Bank's inflation expectations survey, the median expectation of the rate of inflation over the coming year was 4.8%, down from 4.9% in August 2022.

But, for expected inflation in the twelve months after that, respondents gave a median answer of 3.4%, up from 3.2% in August 2022.

The data will inform the Monetary Policy Committee's deliberations ahead of next Thursday's interest rate decision.

The market is poised for a hike of 50bp as the MPC eases the pace from November's 75bp move.

The survey data will however offer greater firepower to the hawks on the MPC who might argue for a repeat 75bp hike.

One of these hawks, Catherine Mann, said in a recent speech inflation is "increasingly embedded" in the economy, necessitating a strong response from the Bank of England.

Her argument is going with big hikes early on will ensure the final level rates rest at would be lower than under a gradualist approach.

There are credible signs that inflation expectations risk deanchoring: asked about expectations of inflation in the longer term, say in five years' time, respondents gave a median answer of 3.3%, up from 3.1% in August 2022.

Inflation expectations matter as they influence the behaviour of workers in seeking wage settlements as well as firms' pricing decisions.

If workers anticipate higher prices they demand greater wages and businesses engage and pursue more aggressive price hikes for their goods and services.

This ensures domestic inflationary pressures reside well above 2.0% unless the Bank hikes rates to cool activity.

Respondents were also asked to assess the way the Bank of England is 'doing its job to set interest rates to control inflation'.

The net satisfaction balance, the proportion satisfied minus the proportion dissatisfied, was -12%, down from -7% in August 2022.