Inflationary concerns

May 18, 2011, 5:52 PM GMT+0

A look at the YouGov SixthSense report on the latest Bloomberg/YouGov Household Economic Activity Tracker (HEAT) does little to ease any concerns about a prolonged period of inflation, which the UK Consumer Prices index (CPI) put at an annual rate of 4.5% in April, up from 4% in March, and which is now showing inflation at its highest level since October 2008. This will increase the pressure on the Monetary Policy Committee to raise interest rates.

We can see that people are already noticing prices going up and inflationary expectations remain high. Over half of the British public are becoming more price conscious when shopping, not surprising when you consider that only 13% expect cash available for household spending to increase over the next 12 months (42% expect it to decrease) but 8 in 10 expect prices to rise over the next year. Over half of those expect them to rise by 5% or more.

MPC faces a difficult decision

The challenge for the MPC is that although general economic confidence did improve over the last month, it still remains very low (-24) and it will fear that an interest rate rise will reverse the minor gains that we have seen previously. Perhaps, though, the public has already factored in a rise; three quarters expect rates to go up over the next year but most only expect that rise to be slight. Quantifying that – the median expectation is for interest rates to be at 1.5% this time next year.
High inflationary pressures, low consumer confidence and a slight interest rate rise over the next year are all public views that could have an impact on the MPC’s eventual decision.

A version of this article originally appeared in City AM