UK firms are feeling more optimistic about the prospect of inflation, providing a boost to the Bank of England's efforts to bring prices back to target. According to a survey conducted by the BOE, executives from various companies revealed that they expect consumer prices to rise by 3.3% three years from now. This is the lowest reading in at least 15 months, down from 3.7% in June. This positive development comes hours after the BOE announced its 14th consecutive interest rate increase in its ongoing battle against inflation, which currently remains almost four times higher than the target rate of 2%.
Over the past year, expectations for CPI over a three-year period have been around 4%, but they have started to soften in recent months. Projections for the upcoming year have also decreased, with business leaders now predicting inflation of 5.4%. However, this figure is still incompatible with Prime Minister Rishi Sunak's goal of cutting inflation in half by the end of the year. To meet that target, CPI would need to average around 5.3% in the fourth quarter. The decline in inflation expectations appears to be driven by the hope that wage pressures, which have been particularly intense due to the tight labor market, will soon ease.
Wage growth expectations for the year ahead decreased to 5.2% in the three months leading up to July. The survey also revealed that unit cost growth, which has been running at 9.4%, is expected to moderate to 6.7% in the coming year. Additionally, the gauge of corporate pricing power showed a slight easing, with firms expecting to increase output prices by 5.2% over the next 12 months, down from 5.3% in June.
Despite these positive trends, businesses still expressed a fair amount of uncertainty, with 53% stating that the overall level of uncertainty facing their business was "high or very high," an increase from 47% in June. The BOE noted that this contradicts the overall downward trend in uncertainty since September. Price uncertainty, in particular, remains at relatively high levels.
Overall, the survey results indicate a more positive outlook among UK firms regarding inflation. The decline in inflation expectations suggests that businesses are hopeful that wage pressures will ease in the future. However, concerns over uncertainty remain, indicating that businesses are still cautious about the future economic landscape.