UK public inflation expectations fall to lowest in nearly 3 years

UK public expectations of inflation have hit a near three-year low, returning to their long-term average before prices began surging, according to official data that will be welcomed by the Bank of England ahead of its interest rate decision next week.

The average Briton in May forecast the rate of price growth in the next 12 months to be 2.8 per cent, down from 3 per cent in February, said a quarterly BoE survey published on Friday.

The reading was the lowest since August 2021, before the worst inflationary upsurge in a generation. It was below the peak of 4.9 per cent in August 2022 and in line with the 2000-21 average of 2.8 per cent.

The survey will be welcomed by the BoE’s Monetary Policy Committee, which will announce its next decision on interest rates on Thursday, because inflation expectations affect consumer spending and wage setting.

The latter is a key factor in domestic price pressures, which central bank officials have been watching closely.

Tomasz Wieladek, chief European economist at investment company T Rowe Price, said the data was “clearly good news for the MPC” and “supportive of a first cut” to rates before the end of this year.

He added that the fall in inflation expectations probably resulted from easing price pressures in energy and food, but warned that they could rise again if services costs remained high.

The BoE is widely expected to hold interest rates at their 16-year high of 5.25 per cent next week, with financial markets pricing a 37 per cent probability of the first rate cut in August.

Annual inflation eased to 2.3 per cent in April, down from 3.2 per cent in the previous month and well below its 11.1 per cent peak in October 2022.

Inflation data for May will be published on Wednesday, with economists in a Reuters poll forecasting the annual rate will hit the BoE’s 2 per cent target before rising again to 2.4 per cent in the final three months of 2024.

The central bank’s survey also showed Britons’ inflation perceptions have eased. Asked to name the current rate of inflation, respondents gave a median answer of 5.5 per cent, down from 6.1 per cent in February 2024, the lowest since February 2022.

This improved the public’s view of the BoE. In May, the share of people satisfied with its approach to managing inflation rose to 25 per cent, the highest in more than a year.