Inflation expectations rise

Sarah Davidson

September 16, 2010

Despite the current rate of inflation measured by the consumer prices index being 3.1%, respondents to the Bank’s inflation attitudes survey believed inflation to be higher at 3.6%.

Bank of England governor, Mervyn King, said: “Inflation has been volatile in recent years. On average, it has been above target and is likely to remain so until the end of next year. During the past two years inflation moved above 5%, then fell to 1.1%, rose again to 3.7%, and is now falling back once more.

“It is not difficult to identify the factors that have contributed to those movements in inflation – changes to VAT, volatility in energy prices, the 25% exchange rate depreciation, and the sharp movements in the real economy.”

The June survey also saw more people say that higher inflation would harm the economy than the month before. By a margin of 62% to 9%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster, compared with 56% to 11% in May.

In spite of the base rate remaining steady at 0.5% since March 2009, 24% of respondents thought that interest rates had fallen over the past 12 months, compared with 34% in May, while 29% of respondents said that interest rates had risen over the past 12 months, compared with 23% in May.

When asked about the future path of interest rates, 48% of respondents expected rates to rise over the next 12 months, compared with 52% in May. Some 5% of respondents expected interest rates to fall over the next 12 months, compared with 6% in May.

Asked what would be best for the economy – higher interest rates, lower rates or no change – 20% thought rates should go up, compared with 25% in May.

Some 17% of respondents thought that interest rates should go down, compared with 15% in May. And 39% thought interest rates should stay where they are, compared with 37% in May.

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