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April 19, 2006 3:00 am
The chances of an interest rate cut receded further after the Bank of England's latest survey of public expectations of inflation this year showed a sharp jump from November.
The Bank's quarterly survey of attitudes to inflation, published yesterday, showed people think inflation is far higher than it really is.
On average, people think prices are rising at an annual rate of 2.8 per cent and they expect them to increase by 2.7 per cent over the next year.
Both figures are the highest recorded since the survey, carried out by NOP, began in November 1999 and are well above the true rate of 2 per cent for consumer price inflation - in line with the bank's target - in February. Analysts expect this to nudge higher when the Office for National Statistics publishes the figure for March tomorrow.
The poll results will strengthen the hand of those on the Bank's monetary policy committee whose arguments that it is too soon to relax about the threat of inflation passing through to wages and general prices are likely to be detailed in the minutes of the April meeting, published today. The recent pick-up in oil prices is likely to increase the MPC's vigilance.
Mervyn King, Bank governor, who is regarded as an inflation hawk and who voted against last year's quarter-point interest rate cut, has been most vocal in expressing this concern.
Others, such as Kate Barker, one of the four external MPC members, have said they are sympathetic to lower interest rates but have held back from voting for one because of the threat of rising inflationary pressure.
The survey of 3,939 randomly selected people was carried out between mid-February and mid-March.
In the November survey, people had said they expected inflation to average 2.2 per cent over the next year.
The Bank regards people's assessment of inflation as important in keeping price pressures under control. If people expect prices to rise, they are more likely to demand bigger wage increases, and higher inflation can become a self-fulfilling prophecy.
A preliminary version of the survey, published last month, was discussed at last month's MPC meeting.
Noting that other surveys had not shown a sharp jump in public inflation expectations since the autumn, according to the minutes: "It was possible that the apparent rise in inflation expectations in the Bank/NOP survey reflected a reaction to the announced rises in utility prices." But the MPC also said: "Inflation expectations data would need to be monitored carefully."
John Butler of HSBC played down the significance of the survey's results, which do not ask respondents about which measure of inflation they have in mind. While CPI inflation, the Bank's target measure, peaked last September at 2.5 per cent, retail price inflation, on which many wage deals are based and RPIX, retail prices minus mortgage repayments, have tended to be higher.
"One should probably not be surprised that inflation expectations are higher now than during the 1999-2005 period when inflation was persistently below the respective targets," said Mr Butler.
"The issue is that the MPC are currently very sensitive, like most central banks, about rising inflation expectations and now their own survey says inflation expectations are rising."
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