Bosses’ inflation expectations highest in two years amid employment freeze
Fears that inflation will remain well above the Bank of England’s two per cent target intensified on Thursday, after a closely watched survey of businesses revealed bosses plan to raise prices at their fastest rate since the height of the cost-of-living crisis.
British businesses also have the weakest hiring intentions since 2020 with firms expecting to keep employment steady over the next 12 months, the first time since the three months to November 2020 that they had not expected to increase staffing.
Finance chiefs polled by the Bank of England said they expect to hike their prices by 3.7 per cent over the coming year, up from 3.5 per cent in August, in a move that could quash any remaining chance of there being another cut to Bank Rate in 2025.
Inflation expectations also remained elevated, with bosses on the Bank’s Decision Maker Panel (DMP) predicting prices to rise across the UK economy by 3.4 per cent, the highest reading since December 2023.
The findings mirror the results of the central bank’s recent survey of households’ inflation expectations, which, driven by recent price spikes in groceries and regulated industries, is now at its highest rate in several years.
Both surveys will add credence to recent arguments made by some of the Monetary Policy Committee’s more hawkish members, who have warned that the inflation outlook looks stickier than officials had previously anticipated.
Inflation fears stalk UK
This week, external member Catherine Mann cited household expectations for inflation hitting 3.8 per cent when she called for interest rates to remain at four per cent for longer, before eventually making a larger cut to reboot the sluggish economy when the time was right.
“I prefer a longer hold… and make a bigger cut when you do to make it very clear that this is not in response to the financial markets or other things,” she told a Bloomberg event. “This is really about the UK economy.”
Rate-setters watch both surveys closely, as they can often be a precursor to so-called ‘second-round effects’, like wage demands from staff or businesses raising their prices.
“The DMP survey will keep the MPC cautious. Wage and price pressures remain stubborn, recruitment difficulties slightly worsened despite weak employment and firms’ inflation expectations rose,” said Rob Wood, chief economist at Pantheon Macroeconomics. “The MPC will have to be cautious, so we remain comfortable assuming no more rate cuts this year.”
Bank officials have been concerned about the darkening outlook for the labour market for months. Governor Andrew Bailey used a speech at a British Chambers of Commerce summit to say rate-setters were watching jobs data “very closely”, while deputy governor Sarah Breeden said this week that further softening could give cause for another cut.