Inflation Anticipation Rises

The new Bank of England Inflation Attitudes survey has just been released suggesting that inflation expectations within the country are continuing to rise this is despite the continued fall in the Consumer Price Index to 3.0% over the last 3 months, the lowest it has achieved in the last 2 years. This will continue to give cause for concern to the already embattled Bank of England which has a government appointed target of 2%.

However for the last 2 and a half years the Bank of England has been unable to achieve this rate. This consequently has led to satisfaction in the way in which the UK Central Bank has been able to handle the UK monetary policy reducing from 20% to an all time low of 11%.

The Bank of England Governor, Mervyn King and his Monetary Policy Committee decided last Thursday that the continued fall in inflation did not merit a restart in their Gilt Purchase Scheme. Which has seen the Threadneedle Street institution hold off from expanding its £325 billion quantitative easing programme began back in March 2009 when the bank injected £75bn into the economy. This method of the central bank buying assets, such as government or commercial bonds. This has not had the desired effect of increasing the willingness of banks and institutions to spend, even though they have greater liquidity as a consequence of the quantitative easing policy. Although in a Bank of England report they claim that it has helped increase the UK’s Gross Domestic Product from 1.5% – 2%.

Interest rates continue to be held at a historic low of 0.5%. These were in the past used as a method of stimulating the economy. As the lower the interest rate the more disposable income individuals had as the cost of borrowing would decline.

The NOP report commissioned for the Bank of England surveyed some 1,966 people and the results not only showed that short term inflation was predicted to decline, but also the medium forecast the survey predicted would rise to 3.4%  from 2.9%. This is despite the fact that the Bank of England believes that by Quarter 3 in 2013 inflation will have returned back to 2%.

With inflation currently standing at 3.0% it is felt that with food inflation flat lining and commodity prices  slackening off this has helped to offset rising distribution and property costs which continue to expand.

There are many negative effects associated with rising inflation. Firstly inflation can adversely impact on savers, for if they are saving when interest rates are at 3.5% but inflation is at 3.7% they will be in effect losing 0.2% annually. Secondly international competitiveness can be effected if one country’s inflation rate is significantly different from its neighbours as their prices will be rising at a higher rate than their opposite numbers consequently impacting on their trade balance.

For businesses, higher inflation rates make it harder to budget and plan for the future when they don’t know how prices will hold in the future. Lastly for businesses higher inflation rates can place greater pressure on wage demands and expectations because their employees will expect to be paid at least in line with inflation.

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