The public is optimistic that inflation will soon come down, with prices expected to be only 3.5% higher in May of 2024.
The Bank of England’s survey of 2,200 adults found that the average expectation for inflation next year is 3.5%, down from 3.9% in a version of the survey conducted in February.
Expectations for 2025 were also improved, with the public predicting inflation of just 2.6% - close to the Bank of England’s 2% target - by this point.
Inflation expectations are seen as a key gauge as they can often prove to be a ‘self-fulfilling prophecy’ for where prices will go next. If people expect higher prices, they are more likely to spend money now before prices rise further, driving up demand, and to bargain for additional wage increases.
The survey eased markets for government debt, as low expectations suggest inflation may not be entrenched, and therefore that the Bank of England may not need to raise interest rates as high as previously thought to get prices back under control.
Yields on two-year gilts had soared in recent days and hit another 15-year high of 4.94% just before the survey was released, as traders bet it was more likely than not that the Bank of England would have to bring rates all the way up to 6%. But gilt yields came back down on the positive news, though rates could still rise as high as 5.75%.
But the public also believes inflation right now is getting higher. When asked about the current rate of inflation, the average response was 9.6%, up from 9.2% in February, despite inflation actually declining during that period.
Only a small majority of people, at 58%, expected interest rates on mortgages, loans and savings to rise over the next six months. That is despite the fact that markets expect the Bank of England to raise its base rate at least four more times.
Meanwhile, 16% said they believed that raising interest rates would be good for the economy, compared to 37% who said it would be good for rates to come down.
Dissatisfaction in the Bank of England was up, with Threadneedle Street’s net approval rating falling from minus 4% to minus 13%.
This morning, Tesco boss Ken Murphy offered cautious hope on the cost of living, saying he sees “encouraging early signs” of inflation starting to ease.
But while he pointed to the supermarket cutting prices for milk and pasta lately, he said the journey to slow down price growth was “not all straightforward”, with prices still rising quickly for most goods.
