UK inflation expectations rise
By Delphine Strauss
Financial Times Published: December 13 2007 11:53 | Last updated: December 13 2007 12:24
Public expectations of inflation and perceptions of the current inflation rate have reached the highest level on record, according to a survey that highlights the dilemma policymakers face in balancing slowing growth with rising price pressures.
The Bank of England's quarterly survey showed on Thursday median expectations of the annual inflation rate over the coming year rose to 3 per cent in November, a sharp jump from August's median of 2.7 per cent and the highest since the survey began in 1999.
Perceptions of the current inflation rate rose from 2.8 per cent to a series high of 3.2 per cent, although official data showed consumer price index inflation at 2.1 per cent in October, just above the Bank's 2 per cent target.
"Today's outcome dents the case for another imminent interest rate cut," said Alan Clarke, economist at BNP Paribas. But Michael Saunders, economist at Citigroup, said a rise in the proportion of respondents saying lower interest rates would be good for the economy "probably reflects a sense that tough economic times lie ahead."
Monetary policymakers keep a close watch on expectations of inflation because they can be self-fulfilling if they lead employees to make higher wage demands or producers to set prices higher. Separately, Gordon Brown, prime minister, told parliament's liaison committee on Thursday that public sector pay had to be limited to control inflationary pressures that were "in danger of getting out of control".
Data this month have shown that wage growth remains modest, but factory gate inflation is running at its highest rate in 16 years as producers pass on rising food and fuel costs.
When it cut interest rates to 5.5 per cent last week, the Bank said it expected higher energy and food prices to keep inflation above target in the short term. Policymakers, who would have seen the survey's findings before the rates decision, have expressed concern over rising inflationary pressures.
Public expectations of inflation can be heavily influenced by changes in the price of frequently purchased items such as milk or petrol even when the cost of major purchases, such as electrical equipment, is falling.
In an analysis earlier this year, the Bank said expectations had proved more closely correlated with the long-standing RPI-X measure of inflation than with the CPI measure targeted by policymakers. RPI-X inflation reached 3.1 per cent in October.
But the analysis also said it was "essential for the effectiveness of monetary policy that inflation expectations remain anchored to the target".
In the quarterly survey, satisfaction with the Bank's performance in setting interest rates to control inflation was at its lowest level since May 2000.