Blow for Bank as consumer inflation fears escalate

The British public believes prices are now rising at 4.9 per cent a year, even though the official rate of inflation stands at only 3 per cent, the Bank of England's latest survey of inflationary expectations revealed yesterday.

The figure is the highest since the series began in 1999, and has jumped by a full percentage point since the 3.9 per cent recorded in February.

Expectations of future inflation also surged to 4.3 per cent in May, up from 3.3 per cent in February.

The increases reflect the fact that "high visibility" inflation in food, fuel and transport bills, which has become increasingly frenzied, looms much larger in consumer perceptions than more moderate increases or even falls in the price of other items purchased less frequently, such as cars, electronics and appliances.

The results will concern the Bank's Monetary Policy Committee, which will have had a preview of the inflationary expectations survey when it kept rates on hold last week.

The MPC has made it clear that preventing an inflationary psychology is an important part of its interest rate policy. The Treasury seems less certain that inflationary expectations frame future price movements than the Bank does, but both fear higher prices pushing wage settlements higher and making firms more willing to try to pass on increases in costs to consumers.

Recent figures on the labour market, however, suggest little feed-through so far in wage settlements. There is also anecdotal evidence that retailers are absorbing some cost pressures in their profit margins.

Nonetheless, the news about inflationary expectations among the public pushed gilts lower yesterday, and market expectations about inflation and interest rates higher – part of a wider international trend.

"Bond investors have shifted their focus to inflation," said economists at Barclays Capital. "Household inflation expectations have risen sharply in every country and in many countries to the highest level since the end of the great inflation of the 1970s. Central banks are warning of tightening. Yields have further to go."

The next consumer inflation figures will be released by the Office for National Statistics next Tuesday, and are widely expected to be at, or above, the 3.1 per cent mark. That will force the Governor of the Bank, Mervyn King, to write an open letter of explanation to the Chancellor, Alistair Darling.