The British public expects inflation to jump over the coming year before it stabilises, according to a survey just days before the Bank of England makes its own assessment of inflation and whether it should impose higher borrowing charges to calm rising consumer prices.
The latest Citi/YouGov survey showed public inflation expectations for the next 12 months rose to 3.1% in July from 2.8% in June, taking this measure further above its long-run average, though below a peak of 3.8% reported last December.
Official figures showed that inflation increased in June to 2.5% and most City economists have forecast that it will head above 3% in the autumn.
The Bank of England’s monetary policy committee meets on Thursday and is likely to revise its prediction that inflation will hit a peak of about 3% this year, shifting the peak to about 3.5%.
Threadneedle Street has said the increase in prices is largely because of temporary factors, such as shortages in supplies due to the Covid-19 pandemic, meaning that inflation will return to its 2% target during the next two years.
However, central bank officials are known to be concerned that the public will begin to think that 3%-plus inflation is the norm and ask for pay rises in excess of 3% to protect their living standards.
Strengthening wage increases could feed into higher prices, forcing the central bank to raise borrowing costs to hit its 2% target.
The survey said that the public’s longer-term inflation expectations for the next five to 10 years held steady at 3.4%.
Higher producer prices are another factor putting pressure on inflation. Factory gate prices across the eurozone rose by 1.4% month on month in June, up from 1.3% in May, and have risen by 10.2% over the last year, according to new data from the European statistics agency Eurostat. The increase was driven by a surge in energy prices, with the costs of intermediate goods used in final products, heavy duty machinery and consumer goods also continuing to rise.
Citi said the rise in short-term price expectations in the UK survey probably reflected fears of higher household energy bills later this year as well as the recent faster-than-expected rise in inflation because of higher oil prices and supply-chain bottlenecks related to Brexit and the pandemic.
It added that the BoE could draw some comfort from a steadying in the public’s longer-run inflation expectations, though it would need to be watchful that the temporary increase in headline inflation later in 2021 did not push long-term price expectations higher.
“A marked increase here could yet force the Bank to tighten policy even if the recovery is incomplete,” Citi said.
The survey also showed that an above-average percentage of people surveyed said they did not know how inflation would change in future, creating a greater chance that an accelerating trend for higher prices in the next few months could trigger an even a stronger shift in long-term expectations, Citi added.