Inflation fears rise sharply as confidence in Bank of England drops

UK inflation updates

Public concerns about inflation rose sharply in August as satisfaction with the Bank of England’s control of prices sank to its lowest level in a decade.

In the BoE’s quarterly survey of attitudes to inflation, more people were satisfied than dissatisfied with the BoE’s performance, but only a third of people said they thought it was doing a good job in keeping prices under control. The 33 per cent satisfaction score was the lowest level since the survey started in 1999 and has only been hit once before in November 2011.

The findings come at a sensitive time with financial markets also expressing increasing doubt over the bank’s ability and willingness to control rising inflation and just ahead of next week’s meeting of the Monetary Policy Committee.

With two new members on the MPC — Huw Pill, who took over as BoE chief economist from Andy Haldane this month, and Catherine Mann, who is replacing Gertjan Vlieghe as an external member — the meeting will be more closely watched than usual as the committee grapples with inflation jumping to 3.2 per cent in August.

Inflation expectations are a crucial indicator of the credibility of the BoE to keep prices under control. If companies and the public do not trust the central bank to control inflation they will be more willing to put up prices and wages in response to short-term pressures.

The latest BoE’s inflation attitudes survey, produced for the bank by Kantar, found that households thought inflation was becoming more of a problem.

In August, the respondent’s median estimate of inflation over the previous 12 months was an underestimate — believing it had risen 2.9 per cent — but this was up from the equivalent estimate of 2.5 per cent in May.

In the coming year, the public is also likely to underestimate the speed prices will rise, creating the conditions for a shock to their living standards. The survey showed inflation expectations were 2.7 per cent for the year ahead, up from 2.4 per cent in May. But the BoE is forecasting the rate to rise to 4 per cent around the turn of the year before moderating in 2022.

During the next five years, the public believe inflation will average 3 per cent a year, up from 2.7 per cent in the May survey and 50 per cent higher than the BoE’s 2 per cent target set by government.

MPC members have shrugged off similar data in the past. But they will be concerned by the findings because the public’s rising anxiety about inflation and the committee’s performance is matched by market sentiment.

Over the next three years, financial markets are expecting RPI inflation — which is currently used in government index-linked bonds — to average 3.85 per cent, up from 3.58 per cent at the start of the month.

At the end of August, the BoE’s preferred indicator of long-term market inflation expectations — the average between five and 10 years into the future — hit its highest level since the financial crisis in 2008.

Philip Rush, founder of the consultancy Heteronomics, said it was worrying that the markets’ inflation expectations were rising so quickly. He expects inflation to come back under control next year, but said this was not guaranteed. “Developments in financial market prices have been more concerning as the upwards trend [in inflation expectations] has now extended to some exceeding pre-Covid norms.”

The BoE declined to comment.


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