Rising fuel prices pump inflation expectations

Inflation expectations for the next 12 months are creeping towards 4 per cent, as a record number of consumers feel the pressure of high fuel, food and energy prices, according to the latest Consumer Barometer from Lloyds TSB Corporate Markets.

The survey of 2,000 consumers in May, found that 90 per cent of respondents believe prices have risen over the last year, compared to 63 per cent in May 2007. And consumers see no letup ahead with 89 per cent believing prices will be higher still in a year's time. Both these figures were the highest since the survey began in 2004.

As a result of high prices, consumer inflation expectations grew further in May. Asked to predict the rate of inflation in 12 months' time, consumers estimated it to be 3.8 per cent, up from 3.6 per cent in April and compared to the latest official inflation reading of 3 per cent.

Continuing the pattern from April, consumers became increasingly gloomy about the outlook for employment and their own job security. In May, the balance of consumers believing employment prospects are worse now than they were 12 months' ago fell 1 per cent to -39 per cent. At the same time, the balance of consumers feeling more rather than less secure in their jobs compared to a year ago fell 4 per cent to -9 per cent. Both these balances were record lows.

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: "Currently at 3 per cent, there's no denying that the immediate outlook for inflation remains high. But the Bank of England's latest report projected that inflationary pressures would ease in the long term as food and fuel prices start to fall next year. In stark contrast to this, our latest barometer shows that consumers do not believe prices will ease and so inflation expectations for the next 12 months are tipping 4 per cent.

"The MPC continues to highlight the need to anchor inflation expectations as key to bringing actual inflation under control. Against this background, any cut in interest rates in the near future would send the wrong signal; that the Bank is more focused on stabilising output growth rather than meeting its inflation target of 2 per cent. With this in mind, if inflation expectations continue to rise over coming months we are facing a period of flat or rising interest rates to bring them back under control."