The bank of england has just completed its quarterly survey of inflation expectations. The results will make uncomfortable reading for the MPC.
The survey suggests that people believe that the inflation rate over the last 12 months is much higher than the CPI rate. When asked about inflation, the median response suggested that prices are increasing at around 4.9 percent a year. Interestingly, this rate is much closer to the RPI inflation rate, which is running at about 4.1 percent.
Going forward, inflation expectations are rising. The median expectation for next year's rate is 4.3 percent, an increase of 1.6 percent compared to a year ago.
Increasing inflation is also beginning to erode confidence in the bank of england. The number of survey participants expressing confidence in the bank is falling, while the number expressing dissatisfaction is rising.
Most wage agreements for 2008 are already settled. In the short run, rising inflationary expectations will not significantly affect wage settlements. The bank of england have a short window of opportunity to reverse the deteriorating inflationary environment and stabilise expectations. However, any delay and next spring wage inflation could begin to pick up.
Inflationary expectations should not be too difficult to resolve - a couple of convincing interest rate increases would do the trick.