The latest Bank of England/Ipsos survey paints a stark picture: UK households are bracing themselves for a prolonged period of price increases, with inflation expectations soaring to a record high. Some 3.9% is the average predicted rise in prices over the next five years, while expectations for the year ahead have jumped to 4%, up from 3.2% in Q1.
The survey's findings come amidst growing concerns about the UK economy's exposure to trade disruptions stemming from the Iran conflict. The Bank of England has warned that a prolonged trade shock could push inflation to 6% and interest rates to 5.25%, underscoring the need for policymakers to remain vigilant in their monetary policy.
Economists are cautioning that even without the recent energy price shock, the Monetary Policy Committee may need to keep interest rates relatively high to combat inflationary pressures. Pantheon Macroeconomics' Rob Wood notes that the survey suggests persistent inflation was still a concern before the war began, making continued restraint necessary.
The European Central Bank has already responded to these concerns by hiking interest rates to 2.25%, and while a UK rate hike next Thursday is unlikely, some economists believe monetary tightening over the summer remains on the table.
The implications for households and businesses will be significant: higher interest rates could lead to increased mortgage repayments, reduced consumer spending power, and a ripple effect throughout the economy, impacting business viability and employment levels.