British businesses expect inflation to rise at its fastest pace for five years, according to a Bank of England survey, as the war in Ukraine pushed up energy prices to their highest level in decade.
Chief financial officers forecast inflation to rise to 4.8 per cent this year – its highest since the Decision Makers Panel survey began in 2017. The expectation was 4.5 per cent in the DMP’s January survey.
Business groups reported that prices rose at an annual rate of 5.4 per cent in the three months to February, twice the rate over the same period last year.
The survey, conducted between February 4 and 18 across nearly 3,000 businesses, predated Russia’s attack on Ukraine, which has pushed the price of oil to its highest level since 2008.
As a result, Steffan Ball, economist at Goldman Sachs, expects that the consumer energy price cap set by the UK energy authority twice a year will rise by 55 per cent in October. This means “the peak in headline inflation shifts from April to October, rising to 9.5 per cent in October and remaining above 7 per cent through 2023 Q1,” Ball explained. He expects inflation to rise to 8.5 per cent in April, up from 5.5 per cent in January.
The DMP survey suggests that domestic price pressures were strong even before the surge in energy prices following the Russian invasion of Ukraine.
Monetary policy setters at the Bank of England have often quoted high business inflation expectations from the DMP survey in recent months to support the need for further monetary policy tightening.
Earlier this week Michael Saunders, an external member of the BoE’s monetary policy committee, said the expectations of rising prices shown in the survey “threaten to keep CPI inflation above the 2 per cent target even once the effect of high energy effects fade, unless restrained by monetary policy ”.
Saunders voted for a rate hike of 50 basis points at the BoE’s January meeting, when rate-setters decided to increase the rate by 25 basis points to 0.5 per cent. He said the DMP survey showed that across a wide range of sectors “firms believe they can pass on rapid cost increases to prices.”
In an earlier speech, Catherine Mann, a member of the MPC, also said the survey showed that businesses’ pricing expectations had solidified “an upside inflation risk for 2022”.
The survey also showed that domestic price pressures were partly caused by widespread labor shortages. In February, nearly 90 per cent of businesses reported they were finding it more difficult to recruit new employees. Nearly 60 per cent of the businesses surveyed reported that recruiting was “much harder”, up 4 percentage points from the previous month.
The labor shortages come as businesses continue to hire to deal with current demand. Businesses reported employment to have grown at an annual rate of 3.8 per cent in the three months to February, the fastest pace in nearly five years. Employment growth for the year ahead was 3.1 per cent, close to the five years high of 3.5 per cent reached in September.