0256 GMT February 27, 2021
The public’s average long-run inflation forecast rose to 3.8 percent in May from 3.4 percent in February, a quarterly survey by the BoE showed, the highest since it first asked the question in early 2009, Reuters reported.
Short-run inflation expectations for the next 12 months edged down to 3.1 percent from a five-year high of 3.2 percent in February, but are well above the BoE’s target of 2 percent for consumer prices.
The BoE keeps a close eye on price expectations among the general public and in financial markets, as some economic models suggest beliefs about future inflation play a major role in influencing wage demands and businesses’ pricing decisions.
British inflation-linked government bonds priced in an average rate of retail price inflation (RPI) of 3.449 percent for the next 10 years at Thursday’s market close, the highest rate since at least 2010.
Fixed income strategists have said this rise reflects concern that a disorderly departure from the European Union will cause the sterling to slide, pushing up inflation.
“This may well have had an upward impact on (public) inflation expectations further out,” said Howard Archer, chief economist at consultants EY ITEM Club.
The BoE has also warned that Brexit risks making Britain’s economy more prone to inflation over the medium term, due to damage to supply chains and shortages of workers from abroad.
The jump in the BoE survey, which polled 2,150 people between May 3 and May 7, contrasts with a steadier picture in a monthly survey of long-term inflation expectations by US Citibank and pollsters YouGov, which held at 3.2 percent in May.
The BoE survey asks about “prices in the shops generally” and does not specify a particular measure of inflation or look at reasons for respondents’ views on inflation.
Consumer price inflation, the measure targeted by the BoE, picked up to 2.1 percent in April while RPI – an older measure which most statisticians view as flawed – rose to 3.0 percent.
Almost half of people surveyed for the BoE said they expected it to raise interest rates over the coming year, up a fraction from February.
BoE Governor Mark Carney has repeatedly said the central bank will need to raise interest rates gradually if Brexit goes smoothly, but financial markets currently price in a greater chance of a cut than a hike over the next 12 months.