Bank of England's Inflation Expectations Survey Heading in the Right Direction
- Written by: Gary Howes
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UK inflation expectations have edged lower across all time horizons, according to the Bank of England’s latest Inflation Attitudes Survey.
The data is an important component in the Bank's decision-making process as the public's perception of inflation determines inflation-setting behaviour.
Declining expectations will give the Bank of England confidence that headline inflation will trend lower in the coming months.
It's the latest piece in a data puzzle that points to the likelihood of a 25 basis point reduction in Bank Rate next week.
📉 Perceptions of Current and Future Inflation
• The median view of current inflation has edged down slightly to 4.7% from 4.8% in August, suggesting a modestly softer public perception of price pressures.
• Expectations for inflation over the next year also ticked lower, the median expectation is now 3.5%, down from 3.6%.
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• Longer-term expectations, both the year after next and five-year outlook, also declined, with the future one-to-two-year median at 3.3% and the five-year outlook at 3.7% (from 3.8%).
What this suggests: People are still expecting inflation above the 2% target, but there's a gradual move toward lower inflation expectations, which is important because how the public anticipates inflation can feed into wage and price-setting.
📈 Expectations for Interest Rate Paths
• Expectations that interest rates will rise over the next 12 months have increased to 38% (from 33%), while the share expecting rates to stay the same or fall has declined.
• Respondents are also tilting toward a belief that lower interest rates would be better for the economy, with 36% choosing cuts as "best for the economy" (up from 33%).
Perceptions of how the Bank of England is doing in controlling inflation have softened, with the net satisfaction balance turning slightly negative (-1%, down from +2%).
The data lands on the same day the ONS reports a fourth consecutive month of negative GDP, confirming a softening economy.
Economists at Berenberg Bank say this economic slowdown is "a necessary evil to get inflation down to acceptable levels."
Berenberg says the central bank is likely to reduce Bank Rate from 4.00% today to 3.00% by July 2026, a more aggressive easing cycle than had previously been anticipated.
