Inflation expectations spike higher

This is the kind of data chart that keeps central bankers awake at night.

The latest survey of inflation expectations from the Bank of England shows that people’s expectations of future price rises have risen sharply in the last three months. On average, respondents to the survey thought that prices were five per cent higher now than a year ago and expectations of where price inflation is heading have spiked up a full percentage point since the last survey in February.

Shifts in expectations lie at the heart of what is sometimes known as the expectations-augmented Phillips Curve. We see rising prices for many of the regularly purchased items in our shopping baskets and when the utility bills come through the letter box. And as our experiences of rising inflation become worse, so we anticipate further price rises in the near future. The danger for the Bank of England is of a wage-price response; a second round boost to wage demands from workers anxious to protect the real purchasing power of their take-home pay. This is a major threat to inflation-control in the medium term.

George Johns, economist at Barclays Capital was quoted in the Financial Times as saying that “To contain inflation, inflation expectations must be anchored.” The result is that the Bank of England may have to start raising official base interest rates to keep inflation in check even though the wider economy is moving into a slowdown phase.