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UK Companies Expect to Raise Prices at Slowest Pace Since 2021 - BLOOMBERG

SEPTEMBER 07, 2023

(Bloomberg) -- UK companies expect to raise their prices at the slowest pace in almost two years, according to a Bank of England survey that suggests inflationary pressures are easing.

Output prices are expected to increase 4.4% over the coming 12 months, the least since November 2021, the August poll of chief financial officers found. The figure was down sharply from 5.5% in July. The three-month average also slowed to 4.9% from 5.2%, below the expectations of economists.

The data are likely to fuel speculation that the most aggressive monetary-tightening cycle since the late 1980s is coming to an end, with BOE rate-setters watching inflation expectations closely. On Wednesday, Governor Andrew Bailey told lawmakers that interest rates are probably “near the top of the cycle” and predicted a further “marked” drop in inflation this year.

The Decision Maker Panel survey also showed firms were more optimistic about consumer-price inflation. They expect prices to rise 4.9% over the next year, with inflation running at 3.2% in three years. Both figures were the lowest since the BOE began polling on CPI expectations in May 2022. 

Traders responded by trimming bets on further BOE tightening. Money markets are pricing a peak rate of around 5.7%, the lowest since June and down from over 5.75% on Wednesday. Gilts rallied and the pound remained lower.

However, firms’ expectations for wage growth over the next year held at 5% amid continued tightness in the labor market. The share of companies reporting difficulties recruiting staff also edged higher again after improving significantly over the last 12 months. 

What Bloomberg Economics Says...

“Price and wage inflation expectations are trending down – a step in the right direction for the central bank.  Still, the decline has been a slow one and expectations remain historically high, adding to the risk that inflation settles above target in the medium-term. With actual data on domestic cost pressure also coming out hotter than the BOE expected, we think a policy pause isn’t yet in the cards. Our view is for rates to peak at 5.75%, from 5.25% currently.”

—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.

A continued easing in inflation expectations would influence price setting and temper wage demands, helping the BOE return inflation to its 2% target.

Bailey said on Wednesday that cooling inflation expectations are key to the thinking of  policymakers ahead of their next policy decision this month. Markets are still leaning toward another quarter-point hike to 5.5% but have pared back their bets in recent days.

On inflation expectations, Bailey said: “It is on a downward path now and the question is, are we going to see it continue to come down. That’s important for our policy decisions now because that’s what shapes a lot of our thinking about the direction of policy now.”

Fellow rate-setter Swati Dhingra said there is no evidence that firms are trying to increase their profit margins, with official data showing producer output prices are now falling.  

--With assistance from James Hirai and Greg Ritchie.

(Adds wages data, market reaction, charts, Bloomberg Economics comments)


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