U.K. Price Expectations Highest Since at Least 1999

By Mark Deen

Sept. 11 (Bloomberg) -- U.K. consumers' predictions for inflation in the next year reached the highest since at least 1999 in a survey for the Bank of England, making it harder to cut interest rates as the threat of a recession looms.

The median forecast on increases in consumer prices for the coming 12 months rose to 4.4 percent, the central bank said today in London. That's the highest since the quarterly survey began nine years ago and compares with 4.3 percent in May. GfK NOP interviewed 2,115 people from Aug. 14 to Aug. 19.

Inflation will accelerate further after reaching 4.4 percent in July and policy makers need to guard against consumers getting a ``5 percent mindset'' about cost increases, Bank of England Deputy Governor John Gieve said this week. The rate has exceeded the bank's 2 percent goal for 10 months, adding to the risk that higher prices will get entrenched.

``If employees try to get bigger wage rises that could trigger a wage-price spiral and that's what the bank is trying to prevent,'' said Hann-Ju Ho, an economist at Lloyds TSB Group Plc in London. ``We think the bank will keep interest rates on hold at 5 percent for the rest of this year.''

The pound was little changed after the report and traded at $1.7501 at 9:38 a.m. in London.

The central bank's forecasts released last month show inflation, which has already reached the fastest pace in at least 11 years, will accelerate to about 5 percent after annual increases in food and energy prices.

Gieve's View

``We've got to ensure that we don't create a 'five per cent mindset' where people think 'oh well, inflation's at five percent, I'd better put my prices up by more than I'd otherwise do,''' Gieve told the Irish News during a visit to Northern Ireland, in an interview published yesterday.

The median response in the survey on the current rate of inflation was 5.4 percent, the highest since at least 1999. That compares with 4.9 percent in May, the Bank of England said.

``Inflation is clearly going to rise above 5 percent and even if it tails off it'll still be more than double the bank's 2 percent target,'' said Lloyds TSB's Hann-Ju Ho. ``The risk is that what should be a temporary rise in inflation gets entrenched if inflation expectations go out of control.''

Wages have so far shown little sign of responding to the jump in the inflation rate. Average earnings, excluding bonuses, increased 3.7 percent in the second quarter, the slowest pace since the three months through January.

Inflation may slow after economic growth stalled in the second quarter. Banks including UBS AG predict the U.K. will enter a recession in the second half of the year.

The central bank has cut the benchmark interest rate three times since last December to cushion the economy from the credit squeeze. Policy makers kept the rate unchanged at 5 percent for a fifth month on Sept. 4.

When asked how to assess the bank's performance in ``doing its job to set interest rates to control inflation,'' the net percentage of people satisfied was at 18 percent, the lowest since the survey began, the report showed. The highest-ever reading was 54 percent in November 2001.

To contact the reporter on this story: Mark Deen in London at markdeen@bloomberg.net