The British public’s inflation expectations ease to a 16-month low

The British public’s inflation expectations fell to a 16-month low, according to data released on Friday, which could strengthen the case for the Bank of England to leave interest rates at 4 percent next week.

According to the central bank’s latest quarterly survey, the average inflation expectation of households in February was 3.9 percent regarding next year’s inflation, which was the lowest since November 2021 compared to 4.8 percent in November last year.

Regarding the expected inflation for the 12 months after February 2024, the respondents answered an average inflation of 3 percent, compared to 3.4 percent in the previous survey, and also the lowest figure for more than a year.

Ahead of Thursday’s policy-setting meeting of the BoE’s monetary policy committee, the drop will be welcomed by policymakers who had worried that high price growth expectations could lead to prolonged inflation.

If people believe that prices will rise rapidly in the future, they are more likely to push for larger wage increases, and businesses respond by raising their prices.

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According to the survey, expectations regarding long-term inflation also decreased to 3 percent from the peak of 3.5 percent last May.

In order to curb high inflation, the MPC raised rates from 0.1 percent in November 2021 to 4 percent at its 11 consecutive meetings. But as rising borrowing costs became more visible, economists and markets were divided about what the committee would do on Thursday. Markets are priced almost flat with no 25 percentage point increase or change.

Martin Beck, chief economic adviser at EY Item Club, a forecasting house, said the “significant” decline in inflation expectations “gave the MPC another reason to keep interest rates unchanged” at its next meeting.

The Median line chart, which shows the British public's inflation expectations, eased in February

According to the findings of the BoE’s latest survey, the unexpected moderation of service provider inflation and salary growth, the further fall in energy prices, and the market turmoil following the problems of the foreign banking sector are coupled with the findings of the BoE’s latest survey. it’s getting weaker,” he said.

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But Paul Dales, chief UK economist at consultancy Capital Economics, said he expected the MPC to raise interest rates again to 4.25 per cent. With inflation proving stickier than expected in other countries, including the U.S. and the euro zone, “caution to make sure we get the job done is attractive,” he said.

Compared to the last quarterly survey, fewer respondents expected interest rates to rise further, and more believed that they would remain unchanged in the coming year.

Public dissatisfaction with the BoE’s approach to managing inflation also eased to 30 percent, down from an all-time high of 35 percent last November, but still higher than the long-term average.