Two-thirds of business leaders expect rapid UK price rises to persist longer than the Bank of England hopes, with most not expecting inflation to peak until spring of next year.
The views from a June survey of the Institute of Directors’ (IoD) membership suggest that companies are planning to raise their prices in moves that are likely to embed high inflation more deeply in the UK economy.
Evidence of persistent price and wage rises has been cited by numerous members of the BoE’s monetary policy committee as grounds for acting “forcefully” with interest rates.
The survey will increase the likelihood that the central bank will increase interest rates by half a percentage point at its meeting on August 4.
Even though financial markets have scaled back expectations of interest rate rises coming from the BoE in response to increased fears of a recession, traders in futures markets still expect a half point rise in interest rates next month.
In its survey, only 27 per cent of IoD members who expressed an opinion thought inflation would peak before the spring of next year. The BoE expects inflation to rise from the 9.1 per cent rate in May to a high of over 11 per cent in October before beginning to fall back.
By contrast, 21 per cent of IoD members thought inflation would peak next spring and a further 45 per cent thought the peak would come even later. Only 7 per cent of its 431 members surveyed declined to express a view.
Kitty Ussher, chief economist of the IoD, said inflation was the prime concern of businesses across the UK and that it was undermining growth and investment.
“What the economy needs right now is a sense that inflation has peaked and is starting to fall back. That in itself would go a long way towards improving both business and consumer confidence, in turn leading to greater investment and growth,” she said.
Noting that the expected peak of inflation among IoD members was “worryingly far into the future”, Ussher added that “if business leaders expect inflation to persist for longer, they may adjust their own pricing strategies accordingly, leading to a potential for the expectation of price rises to become self-fulfilling”.
“We would like to see the Bank of England focus its messaging on when it expects the rate of inflation to start falling again, to re-anchor expectations and bring forward the date at which business leaders believe we are through the worst,” she said.
The IoD survey is not the only bad news on corporate inflation expectations the BoE has received in the past week.
Its own decision maker panel of companies showed an increase in inflation expectations in June and found that managers were expecting to increase pay by 5.1 per cent over the next year. This was up from an expectation of 4.8 per cent wage increases over the following year from the May survey data.
BoE officials have toughened their language on inflation over the past week with Huw Pill, its chief economist, telling an academic audience that the big question for the next meeting was “whether the pace of policy tightening now needs to change”.
Other leading economies are also taking action to tackle inflation. The Federal Reserve increased US interest rates by 0.75 percentage points at its June meeting and the European Central Bank has signalled that it would implement the first rate rise in over a decade at its July meeting.