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(Bloomberg) — UK households expect inflation to accelerate sharply in the coming year while businesses are turning more pessimistic, according to two Bank of England surveys, sharpening the trade-off posed by the Iran war.
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The BOE’s quarterly Inflation Attitudes Survey showed public expectations of inflation for the year ahead increased to 4% in May, up from 3.2% in February and the highest reading since November 2022. Expectations for the longer term climbed to 3.9%, still almost double the BOE’s 2% target.
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Separately, a survey of agents who feed intelligence to the central bank showed firms highlighted the increasingly difficult backdrop for businesses. Confidence has fallen further as the Middle East conflict drags on, with staffing levels expected to be broadly flat over the next 12 months.
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The reports set the stage for the BOE’s meeting this month. While the Monetary Policy Committee has so far voted to hold rates amid the energy shock, officials are increasingly divided over the path ahead.
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Chief Economist Huw Pill has already split with the majority by backing a rate hike, and other hawkish officials have since signalled they may join him amid concerns that the Iran price shock could trigger second-round effect on wages and prices. “The impact of higher-than-expected inflation on 2027 pay settlements is a growing concern for contacts,” the BOE said in the report Friday. Others, including Governor Andrew Bailey, have suggested they are in no rush to raise rates given the weak demand backdrop.
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Supermarkets warned the BOE that food price inflation is accelerating. Prices are currently rising in the range of 3%–4% but the Middle East conflict “will see this increase to around 5%–6%” by the end of this year.
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