Public's fears of higher inflation are a dilemma for the Bank
The Bank of England's dilemma over whether to stimulate the recession-hit UK economy was sharpened further yesterday by a survey showing that the public's inflation expectations have risen in recent months, despite falls in the headline rate.
The Bank's quarterly inflation attitudes survey indicated that people think inflation in five years' time will be 3.6 per cent, up from the 3.2 per cent expected in February, and the highest reading since the survey began two years ago.
Near-term public expectations of inflation also rose, with an average estimate of price rises over the next 12 months of 3.7 per cent, up from 3.5 per cent in February.
The survey will feed into concerns that high inflation expectations are becoming embedded, which could lead to demands for higher wages. It will also strengthen the hand of those members of the Bank of England's rate-setting Monetary Policy Committee (MPC) who believe the Bank should resist calls for more money printing to drag the economy out of its double-dip recession because of the impact of stimulus on prices.
However, Howard Archer, of IHS Global Insight, pointed out the latest survey was done in May, when a spike in petrol prices could have distorted public perceptions.
This week, the MPC voted to keep its £325bn quantitative easing programme on hold, despite calls from the International Monetary Fund for the Bank to enact more monetary stimulus to support the economy.
The consumer price inflation index stands at 3 per cent, after dropping from 3.5 per cent in March.
That fall was welcomed by the Chancellor, George Osborne, who said that it would ease the strain on household budgets.
But the rate remains well above the Bank's official 2 per cent target. At last month's quarterly Inflation Report, the Governor of the Bank of England, Sir Mervyn King, said inflation was unlikely to fall to the target until 2013.
In a further blow to the Bank, the number of people who are satisfied with its performance in controlling inflation fell. The net satisfaction rate was 11 per cent, down from 20 per cent in February – the lowest rate since November last year.
There was better news on inflation from the Office for National Statistics, with a slowdown in producer price rises which should feed through to lower consumer prices. The output price index for manufacturing rose 2.8 per cent in the year to May, down from 3.2 per cent in the year to April.
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