December 13, 2007 / 1:13 PM / 12 years ago

Inflation expectations soar

LONDON (Reuters) - Britons fear inflation will pick up sharply soon, a survey showed on Thursday, further complicating life for the Bank of England as it grapples with an awkward combination of rising price pressures and softer growth.

A general view shows the Bank of England in London in this file picture. REUTERS/Stephen Hird

The Bank is concerned the public perception of how fast prices are rising will become self-fulfilling, even though headline inflation has settled back to near the 2.0 percent target since hitting a decade high of 3.1 percent in March.

If inflation does pick up quickly, the central bank may find it tough to justify a run of interest rate cuts to shore up the economy in the wake of the credit crunch, following last week’s easing to 5.5 percent.

Expectations of future inflation rose to a record 3 percent in November, up from 2.7 percent in August, the Bank said. Perceptions of the current rate also hit a record high of 3.2 percent, above the latest official reading of 2.1 percent.

“These readings will reinforce the MPC’s determination to ensure that the economy slows enough to provide a disinflationary offset, with soft demand that squeezes margins and caps prices,” said Michael Saunders at Citigroup.

“We do expect the Monetary Policy Committee to cut rates further as the economy slows. But, high inflation expectations and some near-term rise in inflation itself will probably ensure that the pace of easing is relatively gradual compared to the deterioration in the economy’s prospects.”

CRUNCH CONUNDRUM

A survey from the Royal Institution of Chartered Surveyors showed house prices falling at their fastest rate in more than two years and Confederation of British Industry data showed factory orders growth slowing faster than expected.

“There is no doubt that we are going through difficult times,” Chancellor Alistair Darling said late on Wednesday.

Major central banks swooped into action on Wednesday to ease money market funding conditions, responding to fears that the credit crunch is far from over.

The U.S. Federal Reserve has already slashed interest rates by a full percentage point to 4.25 percent since in the last few months, but the Bank has only delivered one 25 basis point cut and the European Central Bank has held rates steady throughout.

Central banks around the world — who tend to be charged with controlling price, not economic, growth — are worried that cutting rates too far will trigger a spike in inflation that will need harsh monetary tightening further down the line.

“This morning’s data highlights more than ever the dilemma faced by the BoE,” said Alan Clarke, an economist at BNP Paribas.

“Plunging house price indicators, highlighting downside risks to activity — set against lingering inflation pressures and uncomfortably high inflation expectations.”

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