The UK public’s expectations of inflation have eased to a 16-month low, according to data published on Friday that could add to the case for the Bank of England to leave interest rates at 4 per cent next week.
The central bank’s latest quarterly survey found that, in February, households’ average expectation of the rate of inflation in the year ahead was 3.9 per cent, down from 4.8 per cent in November last year and the lowest since November 2021.
Asked about expected inflation in the 12 months beyond February 2024, respondents on average said it would be 3 per cent, down from 3.4 per cent in the previous survey and also the lowest figure in more than a year.
Coming ahead of Thursday’s meeting of the BoE’s Monetary Policy Committee, which sets interest rate policy, the fall will be welcomed by policymakers, who feared that high price growth expectations could result in longer-lasting inflation.
If people believe that prices will rise rapidly in future they are more likely to push for larger pay increases, with businesses responding by putting their prices up.
Expectations of long-term inflation also declined to 3 per cent, down from a peak of 3.5 per cent in May last year, according to the survey.
In a push to curb high inflation, the MPC has increased rates from 0.1 per cent in November 2021 to 4 per cent now, at 11 consecutive meetings. But as the impact of rising borrowing costs has become more visible, economists and markets are divided over what the committee will do on Thursday. Markets are pricing in an almost equally split probability of a 25 percentage point increase or no change.
Martin Beck, chief economic adviser to the EY Item Club, a forecasting house, said the “significant” fall in inflation expectations offered “the MPC another reason to keep interest rates unchanged” at its next meeting.
“Combined with an unexpected easing in service sector inflation and pay growth in the latest numbers, further falls in energy prices, and market turmoil following banking sector issues abroad, the findings of the BoE’s latest survey mean the case for raising interest rates again is looking increasingly weak,” he said.
However, Paul Dales, chief UK economist at Capital Economics, a consultancy, said he expected the MPC to lift rates again to 4.25 per cent. With inflation proving stickier than expected in other countries, including the US and eurozone, “there is an appeal in erring on the side of caution to make sure the job is done”, he said.
Compared with the last quarterly survey, fewer respondents expected interest rates to continue rising, and more thought they would stay unchanged over the coming year.
Public dissatisfaction with the BoE’s approach to tackling inflation also eased to 30 per cent, down from an all-time peak of 35 per cent in November last year but still higher than the long-term average.