Britain’s string of higher-than-expected inflation readings are driving how businesses plan to set their own prices, new Bank of England research revealed, adding to concerns that high expectations may be becoming entrenched.
Economists wrote in a blog post published by the UK central bank on Friday that business expectations for their own future prices “respond significantly” to the monthly inflation data.
The research suggests that businesses are being fueled more by the sticky inflation readings than forecasts predicting much lower inflation ahead. However, the BOE economists said this could mean a faster easing in businesses’ output prices when inflation falls.
Inflation is coming down much slower than the BOE expects and held at 8.7 per cent in May. A survey on Thursday found that while firms’ year-ahead inflation cooled in June, their three year-ahead expectations rose again.
“In 2022-23 we find that CPI data releases have a positive and significant effect on firms’ own expected price growth in the days following a data release,” BOE economists said in the blog post.
The economists included Ivan Yotzov, Nicholas Bloom, Philip Bunn, Paul Mizen, Ozgen Ozturk and Gregory Thwaites. None are senior policy makers at the central bank. Yotzov, Bunn and Ozgen Ozturk work in the BOE’s Structural Economics Division, while Bloom works at Stanford University; Mizen and Thwaites work at University of Nottingham.
“Looking ahead, it will be crucial to monitor the responsiveness of firms’ expectations as inflation begins to decline in 2023,” the economists wrote.
“High responsiveness may indicate a faster slowdown in firm price growth if the effect is symmetric for inflation increases and decreases. However, a decline in responsiveness could signal more persistence of inflation in the near term.”