Inflation fears reach unprecedented levels

The UK economy will experience the highest ever level of inflation since the Bank of England gained independence and is on course to hit its highest levels since 1992, according to the latest report by accountants and business advisers BDO.

The report, based on all of the UK’s major surveys of business confidence, shows that the expectations of UK business people about inflation remain stubbornly high.

Inflation to hit 3.6 per cent Q3 2008

The report shows a rise in the Inflation Index from 113.4 in April to 115.6 in May, indicating that firms expect inflation to continue to climb, hitting 3.6 per cent in the third quarter of 2008.

Inflation expectations in the service sector will make particularly grim reading for Mervyn King. The Index has crept closer to its record high of 122.9 in March, this month climbing back to 121.7. This indicates that managers in the service sector expect inflation for this sector to grow at an annualised rate of 4.2 per cent over the next quarter.

Fifth consecutive month of rocketing inflation levels

But while this month the Bank of England hastily made substantial revisions to its inflation forecast, evidence of very high levels of inflation expectations has been mounting since January. This was when the Index broke through the 110 barrier to reach 111.8, indicating that inflation would reach over 3.0 per cent. Since then the Index has remained at its highest levels since the report began.

Peter Hemington, partner at BDO LLP, said:

‘Inflation expectations have entered unchartered waters which are going to be very difficult to navigate. The consistently high levels of inflation expectations put the Bank of England firmly between a rock and a hard place when making their decision next week. Faced with rocketing inflation figures, the Bank of England is right to prioritise inflation and to acknowledge the significance of the situation, in particular by markedly revising its original forecasts in line with the evidence which has been available in our report since January.’