As Bank of England’s Breeden has recently warned, the danger is real. He has worried about the recent sharp increase in consumer-level inflation expectations, particularly for what that means for household economics. In doing so, Breeden underscored that if these growing expectations aren’t dealt with, they can become more inflationary—spilling out into the larger economy.
Breeden’s comments are in the context of a stark shift seen since recent bottoms in household inflation expectations earlier in 2024. He added that the current climate reflects a big shift. Expectations have shot way up from just the beginning of this year. This alarming trend underscores the deterioration in consumer sentiment and the increasing risk that a new bout of economic malaise becomes self-fulfilling.
When we spoke during Breeden’s address, he said that the most important thing will be to watch these expectations very carefully. He called for a “moment of reflection.” He encouraged policymakers to think through the economic implications of increasing household inflation expectations. He stressed that inflation will be at different levels. It’s consumer perception that really makes the economy run and affects how consumers choose to spend or save their money.
As Labour points out, the Bank of England had never before actively managed inflation. Breeden’s remarks indicate he has an appreciation for the tightrope walk required to maintain economic stability. Consumer demands are driving spending patterns right now and every day. As long as household inflation expectations are increasing, families may be forced to take steps that inadvertently push inflation higher.
Breeden went on to explain that inflation expectations have changed significantly since 2024. That year was defined by record lows for inflation. The shift signifies a change in consumer confidence and could potentially complicate the BoE’s efforts to manage overall inflation rates. Breeden shines a light on this problem. He wants to encourage a serious discussion about the long-term direction of monetary policy and how it affects ordinary consumers’ lives.
In his analysis, Breeden indicated that the rise in household inflation expectations is not merely a short-term phenomenon but suggests deeper concerns among consumers regarding future economic conditions. With the economy still in flux, households are re-confirming their financial outlooks. If these expectations get embedded, they might set off a self-perpetuating cycle of inflation.
In order to tackle these hurdles, Breeden argues that bottom line up front language from regulators will be critical for establishing and maintaining effective consumer expectations. He believes that transparency regarding economic policies and their intended effects can mitigate fears and stabilize consumer confidence.
The consequences of rising household inflation expectations are dire and extend beyond the economy. They establish trials for the policymakers who must steer the economy with little visibility through these turbulent waters. If these fears are not handled appropriately, we risk creating a self-fulfilling prophecy where increased concern drives real inflation up.