Businesses place trust in UK economy as consumers brace for inflation
Businesses remain confident in the UK economy’s prospects despite consumers bracing for the impact of inflation, according to a long-running survey by the European Commission (EC).
Confidence in the economy “markedly improved” to a 14-month high across industry and consumers, according to the survey, but expectations of rising inflation reached their highest point since January 2011.
Business confidence improved far above the general EU trend, boosted by a strong reading from manufacturing: the index of industry sentiment rose from 7.7 in January to 9.9 points in February.
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While the EC surveys overweight the UK’s relatively small manufacturing sector, the dominant services also saw a strong improvement.
Confidence in the services sector, which makes up almost 80 per cent of the UK economy dipped into negative territory in January, at minus 1.8 points. It bounced back this month to a positive reading of 2.6 points.
Business has performed better than was predicted by many economists following the EU referendum on the back of strong consumer spending which continued to buoy up demand.
However, forecasters are almost unanimous in their belief spending will come under increased pressure as consumer price inflation accelerates.
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The devaluation of sterling by around 17 per cent since the pre-referendum peak has led to price increases for imports, including fuel and food.
The Bank of England said it expects inflation to break its two per cent target when February figures are reported in late March, although the Monetary Policy Committee has repeatedly pointed to an intention to look through inflationary increases not caused by domestic factors.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The largest majority of services firms since records began in June 2003 plan to increase prices over the next three months, while the proportion of manufacturers planning to raise prices rose to its highest level since June 2011.
“We continue to think that the MPC will be surprised by the extent to which inflation rises over the coming months, but we doubt that the Committee will act to rein in a predominately import price-driven inflation shock.”