BoE: we can "rule out the hypothesis that most households expect inflation to return to target in the year ahead".

Today we saw the release of May’s inflation data, which came in a little higher than the market expected.  CPI is running at 2.2% on an annual basis, and RPI remains in deflation, at -1.1%.  Food and energy prices continue to be disinflationary factors, whilst the prices of DVDs, TVs, clothing and footwear rose.  There was a rise in average mortgage payments too, which impacted the RPI number, probably due to people coming off low fixed rate deals – not good news for consumer spending going forwards.

We’ve just seen the Bank of England’s Q2 Quarterly Bulletin, which contains a paper called Public Attitudes to Inflation and Monetary Policy.  Median perceptions of current UK inflation have fallen from over 5%  at their peak in August 2008 to 4% now, but they remain much higher than actual inflation.  The biggest cohort of respondents (about a third) thinks that inflation now is over 5%.  The Bank’s survey shows that people pay relatively little note of falls in their mortgage payments when they think about their own personal inflation rate, which explains why perceptions of inflation remain elevated at a time when RPI (which takes account of lower mortgage payments) has moved into deflation.  People are much more sensitive to household energy bills, food and drink, and transport costs (you go grocery shopping and fill up your car more often than you have a mortgage direct debit go out, and so inflation in food and petrol is much more noticeable).  This is a bit of a shame, for the Bank of England’s monetary policy can only really target (and then only indirectly) the mortgage rate.

The research paper also discusses the role of the media in setting price perceptions.  It’s interesting to note that for the first time, the number of UK newspaper headlines about falling prices has overtaken those about rising prices.  Perhaps this in part explains why, looking forwards, expectations for future inflation have fallen significantly.  25% of participants think that there will be zero inflation, or deflation in a year’s time.  The biggest factor in the perception of future inflation is now “the strength of the British economy” – the Bank suggests that this too might be down to a deluge of negative headlines on the economy (over 1,400 such headlines in the past quarter, and not just in the Daily Mail).

The Bank’s own conclusion is interesting – the Bank of England’s inflation target is not very important in the public’s one year ahead expectations of future inflation!   The Bank does still hope however, that longer term expectations are influenced by the MPC’s 2% target.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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