Inflation will keep breaching BoE target over next half decade

Inflation will routinely breach the Bank of England’s target over the next half a decade, according to fresh data released today.

The Bank’s latest survey on inflation expectations shows Brits think the rate of price rises will hit three per cent in five years’ time, one percentage point above the Old Lady’s target.

Over the next year, inflation will hit 2.7 per cent, and reach 2.2 per cent in the next twelve months after that, according to the survey.

Shortages of products caused by supply chain snarl ups and widespread reports of a paucity of lorry drivers drove Brits to up their inflation expectations, according to Yael Selfin, chief economist at KPMG UK.

Expectations have jumped “not just because the headline inflation has risen but also because many people personally experience the bottlenecks the economy is currently grappling with and the rising costs associated with that. Looking ahead, it is likely that we see some further upward movement in expectations.”

All measures were up on the previous survey conducted in May.

The figures come as officials on Threadneedle Street are gearing up for their next round of rate setting meetings next Thursday. 

The Bank’s monetary policy committee is expected to hold rates at a record low of 0.1 per cent, despite official figures released by the Office for National Statistics this week showing inflation, on an annual basis, posted its highest monthly percentage point rise since records began – up to 3.2 per cent in August. 

Governor Andrew Bailey confirmed recently there was a 4-4 tie at the previous MPC meeting on whether conditions had been met to hike rates, with Bailey falling on the yes side. 

However, Martin Beck, chief economic adviser to the EY Item Club, said: “Surveys of public inflation expectations don’t have a great track record in predicting actual inflation, so it is unlikely the MPC will place too much weight on the numbers in the latest survey.”

Expectations that the the Old Lady will outline its plan to start winding down its bond buying programme, which was ratcheted up at the onset of the Covid crisis to stimulate the economy, are strengthening.

The Bank’s stock of bonds has risen by more than £200bn since the onset of the pandemic. It is aiming to swell its debt stock to £895bn by the end of the year.

The European Central Bank said last week financial conditions were strong enough to allow the central bank to curb bond buying without triggering a sharp rise in borrowing costs. Meanwhile, the US Federal Reserve has signalled it intends to tighten policy this year if more progress is made in the American jobs market.

Thursday’s MPC meeting will be the first to include Andy Haldane’s successor as the Bank of England’s chief economist, Huw Pill.