Record plunge in inflation expectations

Inflation rate expectations among the public plunged by a record amount in November from a record high three months earlier, a Bank of England survey showed yesterday.

YTe median expectation for inflation over the coming year stood at 2.8 per cent, compared with a record high of 4.4 per cent in August, The BoE/GfK NOP Inflation Attitudes poll showed. It was the biggest drop since the survey was launched in November 1999.

The study suggest that public perceptions follow the view of the Bank's Monetary Policy Committee, which in just three months has swung from battling price increases to trying to prevent deflation.

The reversal partly reflects the sharp drop in energy prices, which had pushed inflation to above 5 per cent this year – more than twice the Bank's 2 per cent target.

When asked to state the current rate of inflation, respondents to the survey gave a median answer of 4.9 per cent, compared with 5.4 per cent in August.

While policymakers were concerned earlier this year that expectations of high inflation were at risk of becoming entrenched, those worries have now been overtaken by fears that Britain's economy is heading into a long and painful recession.

The Bank has already cut interest rate by a total of 3 percentage points since October, to just 2 per cent. The cost of borrowing is expected to fall further still.

Analysts forecast that inflation will fall sharply below the Gortdon Brown's 2 per cent target and could even head into negative territory as lower energy prices and the cut in VAT announced last month take effect. Asked what would be "best for the economy" – either higher interest rates, lower interest rates or no change – 8 per cent of respondents to the poll said rates should go up, 46 per cent thought they should go down and 24 per cent thought they should stay unchanged.

The UK inflation rate fell to 4.5 per cent in October, the most in more than a decade. The Bank has said it expects it to undershoot the target next year and the Governor, Mervyn King, has not ruled out the risk of deflation.

Britain's economic outlook is worsening as it slips into its first recession since 1991. The economy contracted by 0.5 percent in the third quarter, and the Bank of England expects it to shrink in 2009. Policymakers cut the key base rate by 1 percentage point to 2 per cent last week, following a 1.5 point reduction in November.