Inflation expectations hit two-year low

As reported by The Times, Britons inflation expectations have fallen to the lowest level in two years, even though consumer prices have stayed stubbornly high

A monthly poll of households undertaken by YouGov for Citigroup, the American investment bank, found that consumers thought long-run inflation over five to ten years would be 3.5% down from expectations of 3.6% in April and the lowest reading since August 2021. Short-term inflation expectations fell by 0.5 percentage points to 4.7%, the weakest since December 2021, when the Bank of England started raising interest rates.

Household inflation expectations are used as a measure of a central bank’s credibility in controlling inflation at low and stable levels and are a key channel through which interest rates work. If consumers expect inflation to be much higher, they can adjust their behaviour accordingly, deepening a price spiral through demands for higher wages.

Inflation expectations have been relatively stable in recent months, even as inflation has failed to fall back as much as expected. Consumer prices inflation fell to 8.7 per cent in April from 10.1% in March, higher than forecasts from the Bank.

Benjamin Nabarro, economist at Citi, said household inflation expectations had been hit by the volatile nature of food prices, which have surged by as much as 19% in recent months.

“Our data suggest household inflation expectations remain anchored at target consistent levels,” Nabarro said. “With food shortages primarily responsible for recent volatility and headline inflation now on a downward trajectory, we think these data are more likely to ease further.”

Similar polling for the Bank shows inflation expectations anchored at about the 3% level for the next three to five years. Households’ concerns have come down from the peak recorded last August, when energy prices were soaring.

The UK is suffering a worse inflation problem than its American and European neighbours, a member of the Bank of England’s monetary policy committee has said. Catherine Mann said it was “more persistent” than in other economies, after core inflation hit a 31-year high in April. Headline inflation eased to the lowest level since August. Mann told a forum hosted by Pictet, the Swiss fund management firm, that the Bank should focus on core inflation, which measures underlying price pressures.