In the UK, firms have already experienced the largest increase in inflation expectations for the next three months σταυροδρόμι. That’s according to the latest Bank of England (BoE) Decision Maker Panel (DMP) quarterly survey, which has CPI expected inflation rising to 3.5% for the quarter ending in September. This is the highest inflation expectation since February 2024, signaling that businesses are increasingly worried about the outlook for prices.
Moreover, as shown in the chart above, the three-month average inflation expectations have risen to 3.4%. This figure is in line with broader expectations. Firms are projecting their own-price inflation for the year ahead at 3.7%, unchanged since July. These revelations further reflect the squeeze that is being put on UK institutions while they struggle to keep afloat amidst a devilish economic landscape.
Recent Trends in Inflation
Core inflation indicates the long-term underlying trend in price changes, and generally, central banks aim core inflation to be stable around 2% level. Core inflation is considered to reflect the underlying trend in price rises, apart from more volatile components like food and fuel. In the United States, core inflation rates are watched very closely by economists and deviations from this target can affect economic policy.
When core CPI consistently exceeds 2%, the obvious signal sent to investors is that central banks will start raising interest rates to arrest inflation. On the flip side, when core CPI drops below this level, it typically results in interest rate cuts to help boost economic activity. Expectations for inflation three years out have remained stuck on 2.9% in the three months ending in September. This stability indicates that businesses expect a slow recovery to more normal economic conditions.
Firms have indicated an above trend growth on their realized annual idiosyncratic own-price growth. It has gone up to 3.8%, up 0.1% from August. This increase is further evidence that businesses are still facing elevated costs of operations, which will continue to impact their pricing decisions in the future.
“One-year ahead expected CPI inflation by the UK firms edged slightly higher to 3.5% in the quarter to September.” – Bank of England (BoE) Decision Maker Panel (DMP) quarterly survey
Employment Expectations and Economic Outlook
Inflation worries top the list of survey response highlights. Moreover, firms’ hiring expectations have flattened out for the next year, registering at 0.0% for the three months ending in September. That figure underscores that firms don’t anticipate big shifts in how they are hiring. This may reflect a weariness as they chart a course through continued economic unknowns.
July’s disappointing increase in payroll employment numbers seems to indicate that employers are already expecting a much more challenging economic environment. They might be experiencing heightened operational stress in these next few months. As companies contend with these unknowns, hiring the right firm will be key. These decisions will be crucial in shaping the commonsense of the American labor market.
Currently, GBP/USD is up 0.18% to around 1.3500. This increase is indicative of the British pound’s recent strength against the US dollar, bolstered by recent macroeconomic events.
Implications for Monetary Policy
These results from the DMP survey have important implications for the Bank of England and its current hawkish monetary policy stance. As inflation expectations go up, policymakers should consider taking more aggressive measures to ensure lasting price stability and foster continued growth.
The stick Core inflation, as traditionally measured by the CPI, has become a new orthodoxy in economic strategy. The Bank of England is once again caught between stimulating recovery through lower interest rates and containing potential inflationary pressures. As we have documented, businesses are under extreme pressure from costs and increased inflation expectations. The central bank’s decisions will serve as critical levers in shaping the country’s economic landscape in the months ahead.