UK Inflation Expectations Surge to Highest Level in Three Months

UK Inflation Expectations Overview

By David Milliken

Short-Term vs Long-Term Expectations

LONDON, Jan 26 (Reuters) - The British public's expectations for inflation over the coming year and further ahead have risen to their highest since October, according to a monthly survey by YouGov for U.S. bank Citi which was published on Monday.

Impact on Monetary Policy

Short-term inflation expectations increased to 3.8% in January from 3.6% in December, while long-term expectations rose to 4.1% from 3.8%. Both measures fell in December and November.

Market Reactions and Predictions

"This move is explicable, given recent data, but it will continue to keep the inflation expectation argument alive for monetary policy despite recent moderation in these series," Citi said in a note to clients.

Inflation expectations are often influenced by recent data for consumer price inflation which rose in December to 3.4% from 3.2% in November.

Bank of England Governor Andrew Bailey has said he expects CPI to return to near its 2% target by April or May, due in part to one-off effects.

However, the central bank's Monetary Policy Committee only narrowly voted for last month's quarter-point rate cut with many of its members concerned that wages are still growing too fast for inflation to return sustainably to 2%.

Citi economists Callum McLaren-Stewart and Michel Nies said that they viewed January's rise in inflation expectations as temporary but thought it would reinforce the reluctance of some BoE policymakers to cut rates further.

"Conversely, we continue to sympathize with those in favour of faster cuts. Our position remains that the disinflation process is neither simple nor linear, but ultimately a combination of softer employment and weakening consumer demand should lead to deeper cuts through Q3 this year," they said.

Financial markets are pricing in one quarter-point BoE rate cut by June and see a roughly 50% chance of another by November, according to LSEG data.

The YouGov data was based on a survey of 2,101 adults on January 21-22.

(Reporting by David MillikenEditing by William Schomberg and Paul Sandle)