Fears that inflation will remain well above the Bank of England’s two per cent target intensified on Thursday. A closely watched survey of businesses revealed that bosses plan to raise prices at their fastest rate since the height of the cost-of-living crisis. The survey, conducted by the Bank of England, indicated that finance chiefs expect to increase their prices by 3.7 per cent over the coming year, up from 3.5 per cent in August. This move could diminish the likelihood of a Bank Rate cut in 2025.
British businesses also report the weakest hiring intentions since 2020, with firms expecting to maintain current employment levels over the next 12 months. This marks the first time since the three months to November 2020 that companies have not anticipated increasing staffing levels. Inflation expectations remain elevated, with the Bank’s Decision Maker Panel (DMP) predicting a 3.4 per cent rise in prices across the UK economy, the highest reading since December 2023.
The findings align with the results of the central bank’s recent survey of households’ inflation expectations, which are now at their highest rate in several years due to recent price spikes in groceries and regulated industries. Both surveys lend support to recent arguments by some of the Monetary Policy Committee’s more hawkish members, who have warned that the inflation outlook appears more persistent than previously anticipated by officials.
This week, external member Catherine Mann cited household expectations for inflation reaching 3.8 per cent when advocating for maintaining interest rates at four per cent for an extended period. She suggested that eventually making a larger cut would help reboot the sluggish economy when appropriate. “I prefer a longer hold… and make a bigger cut when you do to make it very clear that this is not in response to the financial markets or other things,” she stated at a Bloomberg event. “This is really about the UK economy.”
Rate-setters closely monitor both surveys as they can often signal potential ‘second-round effects’, such as wage demands from staff or businesses raising their prices. “The DMP survey will keep the MPC cautious. Wage and price pressures remain stubborn, recruitment difficulties slightly worsened despite weak employment, and firms’ inflation expectations rose,” said Rob Wood, chief economist at Pantheon Macroeconomics. “The MPC will have to be cautious, so we remain comfortable assuming no more rate cuts this year.”
Bank officials have been concerned about the darkening outlook for the labour market for months. Governor Andrew Bailey, in a speech at a British Chambers of Commerce summit, stated that rate-setters were watching jobs data “very closely”. Meanwhile, Deputy Governor Sarah Breeden noted this week that further labour market softening could justify another rate cut.
