IoD – Only a quarter of business leaders believe inflation has peaked

Commenting on the decision of the Monetary Policy Committee of the Bank of England to raise interest rates by 0.5 percentage points to 4%, Kitty Ussher, Chief Economist of the Institute of Directors, said:

“Inflationary pressures are more persistent than the Bank of England had previously anticipated. Core inflation is not yet falling, and price rises are still accelerating for some sub-categories, including food.

“Institute of Directors survey data from January shows that only a quarter of business leaders now believe inflation has peaked, with even more – around four in ten – thinking it will not peak until the summer at the earliest. This matters because expectations of inflation can become self-fulfilling.

“Combined with the welcome news that the Bank accepts its previous warnings of recession were too pessimistic, we think they are right to raise rates again today. This will help establish business expectations of inflation on a firmer downward path, which will itself put downward pressure on prices.

“However, given the long lead times between an interest rate rise and the full economic effect being felt, it is also becoming increasingly likely that interest rates may have to be lowered again once inflation is under control, to prevent the inflation target being undershot in the medium term.”