Inflation expectations 'highest in years'

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The Independent Online

The public's fear of inflation has soared to its highest level in recent years, according to the latest survey of public attitudes, conducted by the Bank of England.

The typical rate given by respondents for inflation over the past year is up to 3.2 per cent in November, from 2.8 per cent in August, the highest since the survey began in late 1999. The public's expectations for inflation in the year ahead also jumped, reaching 3 per cent now, from 2.7 per cent in August (which was the previous high).

Although inflation, as measured by the Consumer Prices Index, was down to 2.1 per cent in October, 75 per cent of those giving a response expect inflation to exceed 2 per cent in the year ahead, another high. "High-visibility" food and fuel inflation will have bolstered the public's perceptions.

The Bank of England monitors inflationary expectations closely and they are a key factor in the Monetary Policy Committee's interest rate decisions (prior notice of the latest figures had been given to the MPC before they cut interest rates last week). The Bank's main worry is inflation expectations will become self-fulfilling and make it trickier for the MPC to continue on the rate-cutting path it set out in its November inflation report.

Michael Saunders of Citi European Economics said: "We do expect the Monetary Policy Committee to cut rates further as the economy slows. But, high inflation expectations and some near-term rise in inflation itself will probably ensure the pace of easing is relatively gradual compared to the deterioration in the economy's prospects."

Higher inflationary expectations were also reflected in the CBI's latest survey of manufacturing, one of the brighter spots in the economy. The CBI said manufacturers have been hit by five interest rate rises in the past year before last week's cut and were hampered by the pound's strength against the dollar. However, despite the prospects of slowing growth, a balance of 15 per cent of manufacturers is still confident about passing on rising energy and raw materials costs.

The CBI's chief economic adviser, Ian McCafferty, said: "It is a case of the sector changing from fifth gear to fourth, certainly not juddering to a halt."

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