Inflation expectations climb to 29-month high

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The Independent Online

Britons' inflation expectations – the extent to which they think prices will rise in the future – are at their highest level for 29 months, a survey by the accountant and business adviser BDO reveals today.

Its inflation index climbed to 108.5 in April, its highest level since the collapse of Lehman Brothers in 2008.

The warning will be a serious worry for the Bank of England, which is currently battling with inflation of 4 per cent, twice its target rate. Higher inflationary expectations can lead to price rises spinning out of control, as consumers demand pay hikes to cope with the price increases they anticipate.

Official measures of inflation expectations and earnings growth have remained relatively muted this year, enabling the Bank's Monetary Policy Committee to keep interest rates at a record low of 0.5 per cent. But rising expectations would give policymakers reason to reconsider that approach in the months ahead.

Nevertheless, BDO urged the MPC not to panic, as its research also suggests the economy will continue to be sluggish in the second and third quarters of 2011 – a problem a rate rise could worsen.