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Although the Bank of England would like to fight a slowing economy by lowering interest rates, rising inflation will keep it from doing so.
The latest Bank of England/Ipsos Inflation Attitudes Survey, published on December 13, 2024, reveals a rise in public expectations for inflation, with median expectations for the next year climbing to 3%, up from 2.7% in August 2024.
It also shows an increase in expectations for inflation over the following 12 months to 2.8% from 2.6%.
Long-term inflation expectations, measured over a five-year horizon, rose to a median of 3.4%, compared to 3.2% in the previous survey. These findings reflect growing public concerns about inflationary pressures in the UK.
This is a significant development for the Bank of England’s policymakers, who are due to make another interest rate decision next week.
Inflation expectations are crucial in driving real inflation outcomes: if people expect higher inflation in the future, they may accelerate their spending to avoid paying higher prices later. This increased demand can, in turn, drive up prices, creating a self-fulfilling cycle of inflation.
Workers anticipating higher inflation may push for higher wages to maintain their purchasing power. This can lead to increased production costs for businesses, which are often passed on to consumers in the form of higher prices.
The inflation expectations data comes on the day it was reported the economy contracted by 0.1% for a second consecutive month, confirming the economy has rapidly lost momentum from the above-trend growth seen in the first half of the year.
The Bank would typically respond to such a development by cutting interest rates, but it will be restrained by inflation that is moving away from the 2.0% target towards 3.0% in 2025.
Public satisfaction with the Bank of England’s performance in managing inflation has dropped, with the net satisfaction balance falling to -1% from 4% in August.
Confidence in the Bank is important because if individuals anticipate central bank actions to control inflation, their expectations may align with policy targets, which helps stabilise real inflation.
The drift higher in inflation expectations could infer that the public thinks the Bank is at risk of letting inflation run loose again.
This underscores market expectations that the Bank will proceed carefully in 2025, cutting interest rates on three to four occassions.
An original version of this article can be viewed at Pound Sterling Live
