–Other Surveys Of Expectations Point To Likely Drop In BOE Survey

LONDON (MNI) – The Bank of England’s quarterly inflation attitudes
survey, out Thursday, could well show a fall in year ahead price
expectations, but for some Monetary Policy Committee members the
survey’s findings seem to be pretty irrelevant.

The previous BOE survey, out in May, showed year-ahead expectations
had risen to 3.3% from 2.5% in the May survey. A Q3 survey for Barclays,
the BASIX survey, found a sharp fall in year ahead inflation
expectations and the BOE could follow suit.

Simon Hayes, economist at Barclays, said in a note that the past
relationship between BASIX and the BOE Inflation Attitudes survey
implies the BOE’s year-ahead expectations will fall to 2.6% from 3.3%.

Another private sector survey, a monthly one for Citi by pollsters
YouGov, found a marked fall in year ahead inflation expectations in July
but this was partially reversed in August.

The Citi/YouGov survey showed year ahead inflation expectations at
2.9% in August, up from 2.7% in July but down from the 3.0% peak in
June.

The significance of rises, or falls, in survey findings on public
inflation expectations is far from straightforward – and there is no
consensus among MPC members on the issue.

They cite the risk of inflation expectations becoming
“de-anchored” from the central bank’s 2.0% target, but deny above target
expectations amount to de-anchoring. Views diverge over whether there is
any real significance to elevated inflation expectations unless they
impact on wage bargaining.

With UK pay growth muted, MPC members have tended to add above
target inflation expectations to things they will “look through” in
setting policy.

MPC newcomer Martin Weale is one who focuses on whether inflation
expectations are impacting wages, and is skeptical about their ability
to influence price setting.

“The evidence I’ve seen does not suggest inflation expectations
have become de-anchored. The MPC does look at this and it’s not the
picture we’re seeing in the data. If inflation expectations were
becoming de-anchored, I’d expect to see the effects of that in wage
bargaining and I’m not seeing that at the moment,” he said in evidence
this week to the Treasury Select Committee.

It is a moot point what “de-anchored” inflation expectations are –
former MPC member David Blanchflower once said he had “absolutely no
idea” what the term meant empirically and couldn’t find anyone who did.

One interpretation of de-anchoring is that it would show up in a
rise in medium to long term inflation expectations in response to a
short term rise.

BOE Governor Mervyn King focussed on this when asked about
inflation expectations following publication of the BOE’s August
Inflation Report.

“In the past two years we do not see any evidence of the ups and
downs of inflation having altered inflation expectations in the medium
term,” King said.

“The short run expectations have clearly risen, as indeed have ours
but in the medium term have remained close to the long-run average
levels,” he said.

MPC member Adam Posen, however, takes the view higher inflation
has fed through to higher expectations and this in turn has fedback into
inflation.

“It appears that actual inflation outcomes, which have
predominantly been overshoots of the Bank’s target for the last four
years, are contributing to a slow upwards creep in inflation trend,”
Posen said, adding he believed this creep was “expectations driven.”

It is a view Weale rejects – he reckons it is unlikely price
setters are driving up inflation in expectation of higher prices
ahead at a time when there is no evidence of significant acceleration in
wage growth.

The BOE Inflation Attitudes survey is due out at 0830 GMT
Thursday.

–London newsroom: 4420 7634 1623; email: drobinson@marketnews.com

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