Expectations of future inflation in the U.K. are slipping.
Central bankers worry about public inflation expectations because they can influence inflation itself further out. If workers expect inflation to be lower in future, they may settle for a smaller pay rise than they would if they thought prices were going to rise quickly. That can lead to slower price growth and weaker inflation overall.
The Bank of England’s quarterly survey of inflation expectations in the U.K., carried out by pollsters GfK NOP, found Britons expect annual inflation of 1.9% next year, compared with expectations of a 2.5% rate when they were last polled in November.
A more dramatic fall in inflation expectations was registered earlier in the week by Citi, which carries out its own survey with pollsters YouGov PLC. According to Citi’s survey, Britons expect annual inflation of just 1% in the year ahead, the lowest reading since late 2008.
The decline reflects very low levels of actual inflation in the U.K., where price-growth has cooled sharply thanks largely to the sharp fall in the oil price. Annual inflation was just 0.3% in January, and BOE officials led by Gov. Mark Carney expect the rate to cool further in the months ahead, perhaps even briefly dipping into negative territory.
BOE officials have said they are watching inflation expectations carefully. But economists say there’s little need to worry just yet. Michael Saunders at Citi said in a research note accompanying Citi’s survey that dwindling inflation expectations and higher pay growth may in the near term support household spending by easing consumer concerns about their financial prospects. Crucially, he added there’s no sign falling inflation expectations are restraining wage growth, at least not yet.
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