Rise in inflation 'expectations'

UK households have become increasingly aware of inflation over the past year, and expect it to rise over the coming 12 months, new research suggests.

The foreword to the Bank of England's second quarterly bulletin of 2008 says energy, petrol and food price rises have increased inflation awareness.

And according to research in a bulletin article, average expectation for annual inflation in a year's time is 4.3%.

Annual inflation stood at 3% in April, well above the government target of 2%.

"In forming its view of the prospects for inflation, the MPC must judge the degree to which businesses are likely to pass on recent sharp cost increases into consumer prices"
Foreword to Bank of England quarterly review

Meanwhile, UK producer prices and costs also rose at a record pace in April.

The Office for National Statistics said that output prices for sales of manufactured products rose at a rate of 7.5% over the year. Input prices rose 23.3% over the year.

Higher food and fuel prices accounted for the rise in input and output prices, along with increases in alcohol and tobacco duties following government tax changes.

'Inflationary pressures'

The foreword to the Bank of England's quarterly bulletin, which does not necessarily reflect the views of the Bank or of Monetary Policy Committee members, points out that energy prices have "accelerated" recently.

Combined with current credit constraints "ultimately, both factors will act as a drag on household and corporate spending", it says.

"But in the near term, higher energy costs also add to inflationary pressures," the bulletin's foreword, written by Bank of England economist Charles Bean, observes.

It adds: "In forming its view of the prospects for inflation, the MPC must judge the degree to which businesses are likely to pass on recent sharp cost increases into consumer prices."

Many economists feel that the MPC needs to wait and see whether higher food and fuel prices lead to higher wages or lower spending in other areas before changing rates.

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