Firms’ inflation expectations for the next 12 months rose higher, according to closely watched Bank of England survey, the results of which could pile pressure on policymakers to raise interest rates. 

The Bank’s monthly survey of firms’ price expectations, the Decision Makers’ Panel, showed price expectations becoming more jittery as costs from the energy price spike could be passed on to consumers. 

One-year ahead CPI inflation expectations rose from about 3.1 per cent in August to 3.3 per cent last month. 

Longer-term inflation expectations and wage growth predictions also edged higher, according to research, reflecting the heap of price pressures building across the UK economy.

The majority of firms responding to the Bank data collectors said that higher energy prices were having a high impact on price-setting. 

A higher proportion of businesses also warned that uncertainty levels were very high, putting the UK economy on less steady footing. 

Figures from the survey heavily influence the Bank of England’s nine-strong committee of rate-setters ahead of crucial decisions on monetary policy. The next meeting for the Monetary Policy Committee is a month away and will come after Chancellor John Healey’s Budget. 

Interest rates pressure builds

Over the last week, several policymakers including governor Andrew Bailey, Clare Lombardelli and Sarah Breeden have cautioned that interest rates may have to be raised from 3.75 per cent if global energy prices remain elevated. 

On Friday, the Brent crude oil price, a benchmark for international prices, hovered around the $100 per barrel mark. Before war across the Middle East broke out in late February, prices were at under $70 per barrel, representing an increase of more than 40 per cent. 

The Bank’s main forecast suggests that inflation could top four per cent in the early months of next year. Both short-term and long-term UK government bond yields have risen. Bank member Catherine Mann has suggested that the Bank needs to raise interest rates to maintain credibility with markets.

On Wednesday, the Bank official Alan Taylor said rate-setters had to remain “vigilant” although he warned that interest rates did not need to “react mechanically” to energy markets. 

Taylor, who is seen as a more dovish member of the Monetary Policy Committee, pointed to the weak labour market and falling food inflation as showing that inflation may not rise as much as some economists fear. 

“Taken together, these developments suggest that the economy is proving less susceptible, at least so far, to a repeat of the dynamics seen in 2022,” he said.