Inflation expectations eased before Middle East energy crisis
Inflation expectations among UK firms eased before President Trump launched a war against Iran, which has sent oil and gas prices spiralling and spooked financial markets.
The Bank of England revealed in its latest decision makers’ panel survey that company directors expected price growth to be 3.3 per cent in the next year when asked in late February.
CPI inflation expectations for the year ahead meanwhile inched up slightly on the month, by less than 0.1 percentage point, though the three-month average recorded was lower than in January.
Bank data has pointed to a broad downward trend in inflation expectations in every month since October.
Inflation expectations outlined in business surveys, including in the Bank’s decision makers’ panel, have weighed heavily on Monetary Policy Committee members when votes have been made on interest rates.
The data might have given Bank doves greater ammunition to vote for an interest rate cut given businesses expected to raise prices at a softer pace than in previous months.
But the outbreak of a war in the Middle East has led to rises in oil prices of over 10 per cent, leaving economists unsettled by the prospect by another inflation rout.
Economists at Westminster think tanks, including the Institute for Fiscal Studies, warned that a rise in interest rates from its current 3.75 per cent level could not be ruled out.
Analysts at consultancies have warned that interest rates are likely to stay higher for longer. Rabobank suggested that interest rates could be left at 3.75 per cent over the next year.
Inflation uncertainty grows due to war
Treasury officials use a rule of thumb on energy market prices suggesting that a 20 per cent rise in the price of oil could add a single percentage point to inflation.
The Office for Budget Responsibility (OBR) said its forecasts pointing to a faster reduction in inflation over the next year were “more uncertain”.
The last inflation rate reading was three per cent, per the Office for National Statistics (ONS).
Bank data published on Thursday also pointed to more positive results for the labour market as employment was set to grow over the next year.
It was the second consecutive month where firms did not expect hiring levels to decline in the next 12 months.
The survey also suggested that firms were braced to offer workers higher salaries than previously, with the wage growth reading inching back up in February.
The dataset also suggested firm bosses had been less nervous about uncertainty levels, which is also subject to change as a result of the war in the Middle East.