The percentage balance of consumers expecting higher inflation over the next year has risen from -5% in July to +4% in October, according to the EU Commission survey. The current balance, while still depressed by historical standards, is the highest since November last year – see chart.
It is tempting to discount the recent increase as a reflection of the coming VAT hike. The latest Citigroup / YouGov survey, however, shows that longer-term inflation expectations have also firmed, with the average forecast rising from 2.8% in January to 3.2% in October.
There is a danger that expectations are moving higher partly because of doubts about the Bank of England's ability or willingness to achieve the 2% inflation target over the medium term. The Bank's inflation forecasts have been consistently too low in recent years while its gilt-buying may have raised concerns about policy independence.
The survey measures are influenced by current inflationary trends and have historically correlated more closely with retail than consumer prices. Headline RPI inflation is likely to rise from -1.4% in September to 3% or more by next spring as a result of the VAT hike and unfavourable energy, house price and mortgage rate effects – see previous post.
Inflation expectations are an important influence on the Bank's policy decisions – the EU Commission measure is a component of the "MPC-ometer" model for forecasting interest rate changes described in earlier posts. The recent increase is a further argument against an expansion of gilt purchases at this week's meeting.