Bank of England: Businesses sharply raise inflation expectations
Businesses’ inflation expectations shot up in March according to a closely-watched Bank of England survey, as bosses braced for a surge in energy costs as a result of the Iran war.
The Banks’ decision makers’ panel, a monthly poll of thousands of execs, found that the average expected inflation rate in the next year was nearly 0.4 percentage points higher than the figure recorded last month.
Expected price growth for the next year had gradually fallen from 3.7 per cent mark hit in October to 3.3 per cent.
But the new survey has shown business expectations are back to where they were last autumn.
Firms also noted that they were experiencing higher inflation in the year to March than in the year to February, suggesting that owners are already feeling the squeeze of higher energy bills.
While the Ofgem energy price cap will protect household bills from the shock until July, several businesses have already seen costs soar as energy prices are set at variable rates.
Data on Wednesday showed that manufacturers had been badly hit, with the spike in input cost inflation rising at the fastest pace since 1992.
Fuel prices are also not capped, hitting motorists up and down the country.
Policymakers at the Bank of England are likely to be put on edge by higher inflation expectations being set by businesses.
Minutes from the Monetary Policy Committee’s last meeting revealed that members stood “ready to act”, fuelling concerns that interest rate hikes were on the cards.
Economists at JP Morgan predicted that there could be two hikes while two-year gilt yields, a proxy for where bond investors believe interest rates will come to, jumped to 4.4 per cent on fears that the Iran war could drag on.
Interest rates are currently set at 3.75 per cent.
Economists fear higher inflation expectations
Elliott Jordan-Doak, a senior UK economist at the consultancy Pantheon Macroeconomics, said that Bank rate-setters may “take some comfort” from a slight fall in wage growth expectations.
The MPC closely monitors wage growth expectations due to fears that higher inflation could push employees to bargain for higher pay packets, leading to a spiralling effect on both data points.
“The more dovish members on the MPC will likely be tempted to discount that increase as news-driven noise for now,” Jordan-Doak said.
“But rate setters will be acutely aware of other measures of households’ inflation expectations jumping recently—like YouGov’s one-year-ahead measure surging 200 basis points—so risks of second-round effects will remain a major worry.”
He added: “We think the bulk of evidence suggests the risk of hikes in 2026 is greater than cuts.
“President Trump’s address last night suggests to us that disruptions to energy markets and supply chains will persist for some time, while households’ inflation expectations jumped sharply and businesses’ expectations have begun to rise.”