British companies have reduced their outlook for both price and wage increases in the coming year, according to the Bank of England's monthly Decision Maker Panel published on Friday. The survey, covering the three months to July, shows businesses now expect price growth of 3.9% over the next 12 months - a downward revision from a 4.1% expectation recorded in the three months to June.
The panel's reading nonetheless remains above the 3.4% rate firms anticipated in February, a figure recorded before the outbreak of the Iran conflict. The survey also put year-ahead wage growth expectations at 3.4%, slipping 0.1 percentage points from the prior reading.
The BoE report notes the fall in price and pay expectations followed a temporary easing of energy costs tied to a ceasefire in the Iran war, which briefly pushed down energy prices. The central bank is actively watching how firms set prices and how wages evolve, and this set of expectations will be assessed as part of policy deliberations.
Market participants and policymakers are likely to view the softer readings as supportive of a decision to keep interest rates unchanged. The Bank of England is expected to hold rates next week, and the survey provides fresh data on the near-term trajectory of inflationary pressures originating from corporate pricing and labour costs.
While the three-month decline from 4.1% to 3.9% signals a step back from a more than two-year high recorded in June, the fact that expected price growth is still higher than the pre-conflict 3.4% illustrates a persistence in firms' inflation outlooks. Similarly, the modest 0.1 percentage point dip in wage expectations to 3.4% points to ongoing above-trend pay pressures relative to the February benchmark cited in the survey.
For policymakers focused on anchoring inflation expectations, the Decision Maker Panel provides a snapshot of business intentions on pricing and pay that will factor into short-term interest rate choices. The survey's reference to the temporary nature of energy price relief underlines how volatile external factors can feed into firms' expectations.
Key points
- Firms now expect year-ahead price growth of 3.9%, down from 4.1% in the three months to June.
- Year-ahead wage growth expectations fell 0.1 percentage points to 3.4%.
- The survey cites a brief drop in energy prices after a ceasefire in the Iran war; the BoE is monitoring corporate price setting and wage growth ahead of a likely interest rate hold next week.
Risks and uncertainties
- Price expectations remain above the February pre-war level of 3.4% - this persistence could sustain inflationary pressure, affecting firms and monetary policy decisions.
- The energy price decline referenced in the survey was brief, indicating that energy-related volatility may continue to influence firms' pricing decisions and cost bases, with implications for energy-exposed sectors.
- The BoE's close monitoring of price setting and wages suggests policy sensitivity to further changes in these indicators; financial markets and banking sector risk assessments may react to material shifts in the data.