David Milliken

LONDON (Reuters – British companies’ inflation expectations over the next twelve months rose to their highest levels in five years according to a Bank of England study. Official concerns about soaring inflation could be slow to decline are likely to rise.

The February 4-18 survey of businesses found that 5.0% inflation is expected in one year. This compares to 4.3% in January and December, which were the highest readings since January 2017.

The BoE’s prefered measure of inflation, which is the 3-month survey average, saw expected inflation rise to 4.8%. This was the highest recorded level.

Inflation in consumer prices was 5.5% in December. Then, Russia’s invasion in Ukraine forced energy prices to rise even more. Accordingly to the BoE, it would hit a high of 7.25% in April and return back at its target of 2% in the following two years.

Surveys of inflation expectations are often used by policymakers to gauge how likely persistent inflation will be following initial shocks that drive up prices. In this instance, the higher energy prices and difficulties in sourcing food.

A variety of factors have contributed to rising inflation expectations.

Other surveys, an IHS Markit purchasing manager’s index and Confederation of British Industry poll released Thursday showed the inflation pressures were highest in the service sector since at least 1996 or 1998.

Last month’s long-term inflation expectations of households were at their highest level since 2011. A measure of the financial market’s expectations for five to ten years was also at its best since 2013.

Since December, the BoE raised interest rates twice and markets anticipate it to do so again in March 17. This will bring Bank Rate back to pre-pandemic levels of 0.75%.

Catherine Mann, a member of the Monetary Policy Committee, highlighted that high wage and price expectations were highlighted in the BoE’s most recent Decision Maker Panel Survey as reasons why she wants to “frontload” tightening and lower return rates in February.

Others have noted, however that rising energy prices could reduce consumer spending power and limit businesses’ ability pass higher costs on the long-term.