UK consumer inflation expectations slow

British consumers expect prices of goods and services to rise more slowly during the next 12 months, with a Bank of England survey finding public expectations of UK inflation have fallen to 1.8% from the previous 2%.

The survey, which was carried out by TNS on behalf of the central bank, also showed that slightly more people expect an interest rate hike with the next year. However, a net balance of 38% expect an interest rate hike within the next year, up from 35% in November and 50% last August.

Expectations also remain limited over how much interest rates will increase over the longer-term.

"The fact that inflation expectations have softened slightly on a one-year and two-year horizon to be at long-term lows actually supports the likelihood that the Bank of England will not be raising interest rates any time soon," said economist Howard Archer from IHS Global Insight.

"There is concern that lower inflation expectations will drag down limit wage growth on an extended basis and increase the risk of prolonged well below target consumer price inflation."

He observed that the public seem to be buying into the Bank of England’s message that when interest rates do start to rise, the increases will be gradual and limited.

Currency expert Dennis de Jong at UFX said oil prices were the main drag on consumer inflation expectations, which have remained low following a steady decline in recent months.

“Since hitting an historic 13-year low last year, few economists are predicting a significant rise in the coming months.

“The big question remains how the BoE will react when it comes to interest rates. While it had long been assumed they could only go up, Mark Carney has remained steadfast and some are even daring to predict he may follow Mario Draghi’s example and cut further.”