Britons’ Inflation Expectations Eased Before Oil Price Shock

Electrical power lines hang from a transmission pylon among houses in Belfast, Northern Ireland, U.K., on Friday, Jan. 3, 2020. With the U.K. due to leave the European Union, questions remain over trading agreements and Ireland's 12-year-old single electricity market, known as the SEM. Photo by Hollie Adams /Bloomberg

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(Bloomberg) — UK households had been expecting inflation to slow over the coming year, according to a Bank of England survey that was conducted before war erupted in the Middle East and sent oil prices soaring. 

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The BOE’s quarterly Inflation Attitudes Survey published on Friday showed public expectations of inflation at 3.2% in February, down from 3.5% in November and the lowest since May last year. 

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The figures suggest central bank efforts to tame expectations have had some success, though the public still sees inflation two years ahead at 3.2% and 3.7% in five years — well above the 2% inflation target.

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However, the poll was carried out between Feb. 6 and Feb. 24, ending four days before the US and Israel launched their attack on Iran. With oil prices back above $100 a barrel, Britons are facing the prospect of another inflationary shock that undermines their living standards and delays more BOE interest-rate cuts.

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There are already signs that the Iran war is pushing up inflation expectations. A Barclays survey conducted at the start of March showed almost eight in 10 Britons were worried that the conflict will send prices soaring, particularly fuel and energy bills.

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Inflation expectations are closely watched by the BOE policymakers as they affect the wage demands of workers and price-setting by companies. The risk of price persistence has led the central bank to take a cautious approach to cutting interest rates.

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How far the latest price shock feeds through into pay growth could be limited by the weakness of the jobs market, which gives workers less bargaining power.

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The BOE’s survey also showed that only 30% of Britons expected interest rates to rise over the next 12 months, down from 38% in November and the lowest since August 2024. 

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However, that number may soon increase as the impact of the Iran war starts to feed through to consumer prices. The Middle East conflict has triggered a dramatic shift in market bets, with traders now starting to price in a rate hike by the end of the year.

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(Updates with interest-rate expectations, chart)

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