World Economy

UK Inflation Outlook at 16-Year Low

UK Inflation Outlook at 16-Year LowUK Inflation Outlook at 16-Year Low

The British public’s expectation for inflation over the next 12 months fell to its lowest in more than 16 years, a Bank of England survey showed on Friday, raising the risk that below-target price growth may become entrenched.

The average expectation for inflation over the coming year among more than 4,000 people polled for the BoE last month sank to its lowest since November 1999 at 1.8%, down from 2% in November 2015, CNBC reported.

British consumer price inflation has been below the BoE’s 2% target for two years and last year it was zero, the lowest since comparable records began in 1950. The BoE expects it to stay below 1% throughout 2016, as the effect of last year’s sharp fall in oil prices fades slowly.

Annual consumer price inflation is currently 0.3%.

The central bank keeps a close eye on public inflation expectations, in case below-target headline inflation becomes entrenched through lower pay demands and business price rises.

But some policymakers take the raw numbers with a pinch of salt, as the surveys often appear closely correlated with moves in headline inflation rather than giving a guide to future price trends.

Inflation expectations for two years ahead dropped to 2.1% from 2.3% in November.

The trend in the BoE survey contrasts with a similar one by polling company YouGov for Citi showed last month that Britons’ inflation expectations for the year to come rose to a five-month high of 1.5% in February.

A Reuters poll earlier this week showed that most economists do not expect the BoE to raise rates until the first quarter of 2017, compared with the fourth quarter of 2016 in a poll just a month earlier.

The BoE poll showed that 38% of the public expect rates to rise in the next 12 months, up from 35% in November but down from 50% in August, the highest in more than four years.

In a letter to the UK Statistics Authority, John Pullinger, national statistician and head of the Office for National Statistics, promised to pump resources into improving the consumer price inflation including housing measure, which takes account of owner-occupied housing costs such as mortgages and insurance.

It would become “focal point of ONS commentary in due course”, he said.

CPIH was stripped of its status as a “national statistic” because of the difficulty of measuring housing costs, and is not widely used in British public life.

Most economists have backed the concept of CPIH, which attempts to estimate the costs of home ownership by using rental costs in the private sector as a proxy for the price of amenities such as shelter, location and space.