Survey shows people expect 2.5% inflation

Published on Thursday 11 March 2010 20:16

THE British public's expectations for inflation edged higher in February, a quarterly survey from the Bank of England has shown.

People think inflation will run at 2.5 per cent over the next 12 months, the February study showed, up from 2.4 per cent in November.

The consumer prices index hit 3.5 per cent in January, well above the Bank's 2 per cent target. It expects it to fall back within target by the end of 2010.

The public estimated in February that inflation was running at an annual 3.4 per cent, compared with 3.2 per cent in November.

Much of the rise in inflation has been driven by one-off factors, such as the end of the temporary cut in VAT, as well as the weakness of sterling and higher commodity prices.

However, the Bank wants to ensure that expectations of above-target inflation do not get entrenched, leading to a long-term cycle of price rises and higher wage demands.

Its monetary policy committee has kept interest rates at a record 0.5 per cent low for 12 months running and ploughed 200 billion into the economy by buying up assets, such as government bonds.

It decided in February that no further "quantitative easing" was required, but Mervyn King, the Bank's governor, has said it is poised to restart the programme if necessary.

In the latest survey, 53 per cent of Britons now expect interest rates to rise over the next year, compared with 6 per cent who predict a fall. That means a net balance of 47 per cent expect a rise – the highest since August 2007.

The poll also showed the public had grown more satisfied with the Bank's performance. There was a net positive balance of 28 per cent in February – the highest in two years – up from November's 24 per cent.

The figures came as Prime Minister Gordon Brown said he believed the UK would maintain its coveted top credit rating – triple A – and announced a pay freeze for senior civil servants and military officers to help to tame a record budget deficit.

Setting out his economic plans, weeks before the general election, he said recovery remained fragile and to change course now would risk plunging Britain back into recession.