Inflation expectations rise for 10th month in row

Inflation expectations have risen for the 10th month running, despite recent falls in oil prices and mortgage rates, a survey shows.

Average expectations for inflation rose to 5 per cent this month from 4.8 per cent in July, the Lloyds TSB Corporate Markets Consumer Barometer found. Consumers' belief that prices will continue to rise will cause concern for the Bank of England as it tries to tame inflation without tipping Britain into a sharp recession.

The Bank is trying to stop the rising cost of energy and food from entrenching inflation expectations, leading to a wage-price spiral. Its Monetary Policy Committee was split three ways this month for a second time as members grappled with the twin threats of surging prices and slowing growth.

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: "Recent price cuts at the supermarket petrol pumps have so far had no effect on consumer inflation expectations. This will be of urgent concern for the Bank of England which has stated inflation will fall back below its 2 per cent target within two years. If inflation expectations continue to grow, bringing down actual price inflation is going to be increasingly difficult.

"The knock-on effect of this trend is that people will negotiate for higher pay rises and retailers will try harder to hike prices because the climate is more lenient towards inflation. This will only hinder efforts to bring inflation under control."

Oil prices have fallen by more than 20 percent from a peak above $147 (£79) per barrel in mid-July, but household energy costs have continued to rise. Mortgage costs have also dipped to pre-credit crunch levels for borrowers with sizeable deposits and good credit records.

Expectations for prices in the survey match the Bank of England's forecast that inflation, which stood at 4.4 per cent in July, will peak at about 5 per cent in the autumn. The Bank hopes its tough stance on inflation will stop it taking hold, allowing the effects of spiking commodity prices to pass and bringing inflation back to the 2 per cent target.

The economy failed to expand in the second quarter of this year for the first time since the slump of the early 1990s, reinforcing expectations that to avoid a painful recession interest rates will have to fall.

Despite rising inflation expectations, the Lloyds survey found a drop in the proportion of consumers expecting higher interest rates. The prospect of slower economic growth dampened expectations of higher rates, but the majority still believed the cost of borrowing would be higher in a year.

Fears about job security intensified with the balance of respondents feeling less rather than more secure in their jobs falling for the sixth successive month to a survey low of -19. The balance is the difference between the number of respondents expecting an increase and the number expecting a decrease.

July saw the largest rise in unemployment so far in the downturn, with a jump of 20,100 in the official jobless figures, the sixth successive monthly rise, bringing the increase in unemployment since the credit crunch began to 70,000. Total unemployment stands at 1.67 million, a rate of 5.4 per cent.