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UK inflation expectations hit 2-1/2 year high

London, March 17, 2011

Britons expect a higher rate of inflation over the coming year than at any time since August 2008, suggesting stubborn price rises are becoming embedded in consumer psychology, a Bank of England survey showed on Thursday.

The BoE's February inflation attitudes survey showed Britons' median guess at where inflation would be over the next 12 months was 4.0 per cent, up from 3.9 per cent in November and twice the Bank of England's target.

Respondents expected inflation in two years' time to be 3.4 per cent and in five years to be 3.5 per cent -- the highest forecasts for these measures since the BoE first asked about them in February 2009.

Inflation has been above the BoE's 2 per cent target for most of the past three years and hit a two-year high of 4 per cent in January.

The central bank has blamed one-off price shocks for the overshoot but is concerned that a prolonged period of above-target inflation could lead to a vicious cycle of price rises and higher wage demands.

In February, three of the BoE's nine monetary policymakers voted to raise interest rates, concerned that consumers might otherwise start to lose faith in the bank's ability to bring inflation back down.

UK interest rates have stood at 0.5 per cent since March 2009 but investors expect them to rise before the end of the year, most likely by August.

"The further rise in inflation expectations in February to their highest level since August 2008 will be of concern to the Monetary Policy Committee," said Howard Archer at Global Insight. "It maintains pressure on the Bank of England to raise interest rates in the near term."

Asked about the current rate of inflation, the typical response was 4.4 per cent, up from 3.9 per cent last time the quarterly survey was conducted in November.

In a sign of growing unease, the balance of Britons satisfied with the BoE's ability to control inflation fell to 17 from 22, its lowest since August 2009.

The survey was based on interviews with nearly 4,000 people across the country between Feb. 10 and Feb. 22. It was conducted by pollster GfK NOP on behalf of the central bank. – Reuters




Tags: inflation | London | UK | Bank of England |

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