UK price pressures showed little sign of easing last month, according to a Bank of England survey of employers that showed inflation expectations and planned pay deals both edging up.
The Decision Maker Panel survey of chief financial officers revealed that firms expect to raise pay by 5.2% in the year ahead, up from 5% in August.
Consumer-price inflation is expected to be 4.9% in 12 months, up from 4.8%. Expectations for three years’ time were steady at 3.2%, though still above the 2% BOE target.
The figures may strengthen the case for one more interest-rate rise as the BOE tries to strike a balance between tackling lingering inflation and propping up the economy amid signs of a slowdown.
Last month, it ended a series of 14 back-to-back hikes after a sharp fall in inflation to 6.7% and a pickup in unemployment. Inflation was 10.1% as recently as March, and underlying measures have also dropped as high interest rates, now at 5.25%, squeeze out demand.
But with official data showing regular private-sector wages growing at more than 8% a year, well above the BOE’s 3.5% comfort zone, money markets are betting on another quarter-point rate hike in November to conclude the fastest tightening cycle since the late 1980s.
A separate survey released Thursday underscored fears about the outlook for growth. Britain’s construction sector suffered its sharpest drop in output since the first Covid lockdown as the housing market slump saw developers cut back building plans.
S&P Global’s construction purchasing managers’ index tumbled from 50.8 in August to 45 last month, dragging the indicator below the 50 threshold separating growth from contraction.
Tomasz Wieladek, chief European economist at T Rowe Price, said the BOE may take some comfort that the DMP survey did not show a sharper increase in expectations given the recent spike in oil prices.
“We would have expected them to be much higher. It is therefore likely that weakening demand conditions offset any rise in expectations from the oil price rise,” he said.
“Perceptions of current inflation remain significantly above target, but are likely to follow expectations, so long as no other major inflation shocks emerge in the meantime.” Inflation is expected to drop to about 5% later this year.
Higher wage and inflation expectations in the DMP survey were based on readings using month by month comparisons. Using a three-month rolling average to smooth out volatility, the picture was better.
Year-ahead inflation expectations fell from 5.3% to 5% in September and three-year ahead expectations dropped from 3.4% to 3.2%. Wage growth projections did not rise but held steady at 5.1%.
Companies also expect to raise their own prices more slowly over the coming year, under both measures. On a one month basis, they plan to raise prices by 4.4% - down from 4.5% in August. On the three-month rolling basis, the reading fell from 5% to 4.8%.
S&P Global’s construction survey added to evidence that the economy faces a tricky final quarter of the year as recession risks mount.
Tim Moore, economics director at S&P Global Market Intelligence, said construction firms had warned of “cutbacks to new residential development projects in the wake of sluggish demand and rising borrowing costs.”
“The survey’s forward-looking measures once again remained relatively downbeat as order books decreased at an accelerated pace and business activity expectations eased to the lowest so far this year.”
