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UK public expectations for inflation have fallen to the lowest in well over two years and close to their long-term average, according to official data that will reinforce the case for interest rate cuts by the Bank of England this year.
In February, the average Briton expected the rate of price growth in the next 12 months to be 3 per cent, down from 3.3 per cent in November, according to a quarterly BoE survey published on Friday.
This was the lowest rate since August 2021, before inflation started surging and Russia’s full-scale invasion of Ukraine, which further drove price pressures. It was also close to the long-term average of 2.8 per cent between 2000 and 2021.
Inflation expectations are closely monitored by interest rate-setters because they affect wage setting, a key factor in domestic price pressures. They also affect consumer spending behaviours.
The figures on Friday will add to the case for the BoE to begin cutting the cost of borrowing this year, after the central bank raised its benchmark rate from a record low of 0.1 per cent in November 2021 to a 16-year high of 5.25 per cent in a bid to tame price growth.
James Smith, economist at bank ING, said the data echoed trends in equivalent surveys of businesses, which had been pointing to softer price and wage increases in coming months. “It supports the broader story that price pressures are easing, but the Bank will need to see more data before acting,” he added.
Headline inflation stood at 4 per cent in January, unchanged from December but well below a 42-year high of 11.1 per cent in October 2022.
Inflation data for February will be published on Wednesday, with economists polled by Reuters forecasting a further easing to 3.6 per cent.
The BoE has predicted that inflation will drop below 2 per cent by the spring and end the year marginally above that level.
Financial markets expect the BoE’s Monetary Policy Committee to keep rates unchanged at its next meeting on Thursday. They are pricing the first cut in August.
Paul Dales, economist at Capital Economics, said the central bank would “be pleased that the public’s inflation expectations have continued to fall, but it probably doesn’t mean the first interest rate cut is any closer”.
He added that if inflation fell as the research company forecast to 1 per cent later this year, “it might not be too long before the bank shifts from worrying about inflation being too high to worrying about it being too low”.
The survey, which was conducted by Ipsos and last took place in February, also showed that Britons’ expectations of inflation in five years’ time dropped to 3.1 per cent, slightly below the long-term average of 3.2 per cent.
The proportion of people expecting interest rate cuts in the year ahead jumped 10 percentage points to 26 per cent.
“Public perception has shifted, expecting inflation to cool and interest rates to stabilise or decrease, reflecting a cautious optimism about the future,” said Dariusz Karpowicz, director at consultancy Albion Financial Advice.
Better expectations for price growth helped boost public confidence in the BoE’s approach to tackling inflation, with the proportion of people dissatisfied falling to 29 per cent, the lowest in almost two years.