Bank of England Survey Points to Rising Inflation and Unemployment

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It's a worst-case scenario for the Bank of England as its own survey of senior financial managers shows rising inflation expectations, pricing intentions and job cuts.

The Bank should cut rates when unemployment grows, but it should raise them when inflation builds, leaving it in a bit of a bind as 2025 gets underway.

According to the Bank's Decision Maker Panel survey for December, inflation expectations among UK Chief Financial Officers (CFOs) remain persistently above the Bank of England's 2.0% target, with slight upward revisions.

Year-ahead, own price inflation is now projected at 3.8%, a marginal increase from November’s 3.7% and significantly above the target.

This 3.8% also matches the realised annual output price inflation reported for the three months ending in December.

A similar trend was observed in CFOs' Consumer Price Index (CPI) inflation expectations. While the perceived CPI inflation for the three months to December edged down slightly to 2.5% from 2.6% in November, the one-year-ahead expectations increased from 2.7% to 2.8%.

Expectations for CPI inflation over a three-year horizon also rose, from 2.6% in November to 2.7% in December.

These expectations suggest that firms foresee inflationary pressures continuing, defying the Bank of England's attempt to bring inflation to 2.0%.

In the labour market, reported annual wage growth eased slightly, dropping by 0.1% to 5.4% in December. However, expected year-ahead wage growth remained stable at 4.0%, indicating that firms anticipate sustained labour cost pressures in the short term.

The survey also highlighted the negative impact of the employer National Insurance contribution increase introduced in the Autumn Budget.

On average, across the November and December surveys, 61% of firms reported that they expect the hike to reduce profit margins.

Furthermore, 54% plan to raise prices, 53% foresee a reduction in employment levels, and 39% anticipate paying lower wages than they otherwise would have.

The survey points to rising inflation and unemployment, which suggest stagflationary economic conditions in the year ahead.

The British Retail Consortium warned earlier that retailers will experience an impending 'spending squeeze' in early 2025 as consumers retreat from uncertainty.

The BRC's latest survey showed consumers' personal financial situations remained at -3 in December, unchanged from November, while perceptions of the state of the economy deteriorated to -27, down sharply from -19 the previous month. Personal spending on retail dropped to -3 in December, down from +3 in November.

Overall personal spending remained positive at +11, but this was a decline from +17 the prior month.

The drop off in sentiment is being felt in other consumer-facing industries, with anecdotal reports of fading demand. "The downturn in consumer spending will weigh on growth this year. We are already seeing customers reducing discretionary spending," says Paul Hayward, senior manager at NonGamStopBets.com.

Public confidence has taken a "nosedive," according to the BRC, falling eight points to -27. Helen Dickinson, Chief Executive of the BRC, highlighted the "widening gap between expectations of the economy and of people’s own finances, which remained unchanged."

However, she noted a generational divide, with 18 to 35-year-olds remaining "considerably more upbeat than older generations."

Dickinson added, "If these expectations are realised, retailers could find themselves facing a New Year spending squeeze just as they unveil their January sales. The weak spending intentions could pave the way for a challenging year for retailers, who face being buffeted by low consumer demand and seven billion pounds of new costs from the Budget set to hit the industry in 2025."