Bank of England Survey Reveals Growing Inflation Expectations and Job Cuts

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The Bank of England faces a tough situation as its own survey of senior financial managers reveals rising inflation expectations, increased pricing intentions, and job cuts.

The Bank typically raises rates when inflation grows and cuts them when unemployment rises, but the economic conditions at the start of 2025 complicate this decision.

According to the Bank's Decision Maker Panel survey for December, inflation expectations among UK Chief Financial Officers (CFOs) remain persistently above the Bank’s 2% target, with slight upward revisions. One-year ahead, businesses expect their own price inflation to reach 3.8%, up from 3.7% in November, and significantly higher than the target. This aligns with the reported annual output price inflation for the three months ending in December.

Similarly, CFOs' expectations for the Consumer Price Index (CPI) inflation show an increase in one-year-ahead expectations, rising from 2.7% to 2.8%, and a rise from 2.6% to 2.7% for a three-year horizon. These figures suggest firms foresee inflationary pressures continuing despite the Bank of England's efforts to bring inflation down to 2%.

In the labor market, annual wage growth slightly eased to 5.4% in December, down by 0.1%, but year-ahead wage growth expectations remain steady at 4.0%, indicating that companies expect continued labor cost pressures in the near term.

The survey also pointed out the negative impact of the increased employer National Insurance contributions introduced in the Autumn Budget. About 61% of firms expect this hike to reduce profit margins. Additionally, 54% plan to raise prices, 53% expect to reduce employment levels, and 39% foresee paying lower wages.

The survey highlights rising inflation and unemployment, pointing to stagflationary conditions in the year ahead. The British Retail Consortium (BRC) has already warned that retailers will face a spending squeeze in early 2025 as consumers cut back due to uncertainty.

The BRC’s latest survey shows that consumers’ financial situations remained unchanged in December, but their perception of the economy worsened significantly. Personal spending on retail fell to -3 in December from +3 in November, indicating a decline in consumer confidence. Overall personal spending still remained positive at +11, but this was a drop from +17 the previous month.

This decline in consumer sentiment is being felt across other industries, particularly those facing direct consumer interaction. As Paul Hayward from NonGamStopBets.com noted, "The downturn in consumer spending will weigh on growth this year, with customers cutting back on discretionary spending."

The BRC reports a sharp decline in public confidence, with a drop of eight points to -27. CEO Helen Dickinson pointed out the widening gap between economic expectations and personal financial outlooks, but noted that younger generations (18 to 35 years old) remain more optimistic than older age groups.

Dickinson warned that if these expectations hold true, retailers could face a challenging start to the year, with a spending squeeze just as they launch their January sales, potentially leading to a tough year ahead with low consumer demand and new costs from the government’s budget hitting the industry.

 

 

 

 

 

 

Paraphrasing text from "Investing.com" all rights reserved by the original author.