UK inflation expectations leap in fourth quarter

A post-Brexit increase in inflation expectations gathered pace in the fourth quarter of 2016, according to the Bank of England's latest inflation attitudes survey.

Expected inflation one year ahead rose 60 basis points to 2.8%, while expectations two years ahead rose 30bp to 2.5%. The BoE itself forecasts inflation will peak at around 2.9% in early 2018 before sinking back towards the target of 2%.

The UK's vote to leave the European Union in June sent the pound tumbling, which has launched inflation on to an upward path, having been stuck at around zero for months due to the effects of the oil price slump. CPI inflation hit 0.9% in October.

The BoE's inflation survey shows members of the public tend to overestimate the strength of inflation, with responses giving a median value of 2.3% in November.

Nevertheless, since the Brexit vote, expectations have gathered pace, showing a slight uptick in August and a greater increase at the latest count, possibly pushed higher by the BoE's broad package of easing measures which were unveiled on August 4.

The central bank had indicated it would probably cut the policy rate again by the end of the year, but has since reversed course. At the same time, officials including governor Mark Carney say they are willing to tolerate higher inflation for a period, as tightening would cost an estimated 250,000 jobs.

The inflation survey also contains information on the public's attitude towards the central bank. Satisfaction, measured as those with a positive view minus those with a negative one, rose to around 30% in 2013, shortly after Carney took office, and has remained at similar levels since. The highest figure, 54%, was recorded in 2001.

Indeed, Carney probably cannot take too much credit: satisfaction shows strong negative correlation with the perceived inflation rate (more so than the actual inflation rate), and the oil price shock sent prices, both perceived and real, plunging soon after he joined the central bank.

Occasional questions in the survey also gauge people's knowledge of the BoE's work. Asked which group of people sets monetary policy, only 8% correctly identified the monetary policy committee. The majority, 53%, said they don't know, while 29% chose the Bank of England as a whole.

The 8% figure is, however, the highest recorded in the BoE's long-run dataset, which extends back to November 1999.