British businesses now expect to raise prices over the coming year by less than they had planned previously, a Bank of England (BoE) survey showed on Thursday, offering some reassurance to policymakers that inflation is on course to return to target.
Businesses surveyed in the three months to August expected to raise prices by 4.9% over the coming year, the smallest percentage increase since February 2022 when Russia invaded Ukraine, and down from 5.2% for the three months to July.
Looking at more volatile single-month data, expectations for output price inflation dropped from 5.5% in July to 4.4% in August, the lowest since October 2021, before the BoE started its current cycle of interest rate rises.
The BoE has increased rates 14 times since December 2021 and, on Wednesday, Governor Andrew Bailey told a parliamentary committee the central bank was now “much nearer” to the end of its rate-rising cycle than before. However, he did not rule out raising rates again later this month from their current 5.25%.
Consumer price inflation peaked at a 41-year high of 11.1% in October 2022, but has been slower to fall than in other big economies and was 6.8% in July. Bailey said it might rise slightly in August before resuming its decline.
Economists at Citi said the fallback in businesses’ pricing plans might partly ease the BoE’s concerns that inflation would be much slower to fall than it was to rise, especially as the BoE placed trust its own data more than external surveys.
“As such evidence in this direction continues to build, we think this poses increasing dovish risks,” they said.
Inflation target
However, Thursday’s figures — part of the BoE’s monthly Decision Maker Panel survey of more than 2,000 CFOs — were not completely reassuring for the central bank, which aims to return inflation to its 2% target by early 2025.
Businesses expect CPI inflation in a year’s time to be 4.9%, down from expectations of 5.4% in July but above the BoE’s own forecast last month of 2.8% for the third quarter of 2024. Businesses see CPI in three years’ time at 3.2%.
Businesses also expect wages will rise by 5.0% over the coming year, unchanged from their expectations in July.
Annual wage growth, excluding bonuses, was a record 7.8% in the three months to July, compared with rates of 3-4% before the pandemic when CPI was close to its 2% target.
An article by BoE researchers and external academics who had worked on the survey, published on Thursday, highlighted how previous months’ data showed businesses aimed to rebuild profit margins which had been squeezed over the previous year.
While firms mostly achieved higher margins by increasing sales volumes, raising prices also played a role.
“Margin rebuilding could make some contribution to inflation persistence,” they said.