UK inflation expectations ease in July, boosting rate cut hopes

According to the latest monthly Citi/YouGov survey, the British public's expectations for future inflation continued to decline in July, offering relief to policymakers tracking persistent price pressures.

Expectations for inflation over the next five or more years, a closely watched metric by the Bank of England (BoE) for signs of "de-anchoring" dropped to 3.7% in July, down from 3.9% in June.

Year-ahead expectations, which tend to be influenced by moves in short-term inflation and energy prices, decreased to 3.4% from 3.8%.

The BoE's policymakers routinely monitor inflation expectations for signs that price pressures could become embedded among consumers as well as businesses.

The surge in energy costs triggered by the Iran war prompted the central bank to pause its run of interest rate increases earlier this year.

"Like with gas prices, there remains a risk that a delayed increase in pump prices could trigger a small increase in expectations," Callum McLaren-Stewart, an economist at Citi, said.

"But given pump prices react quickly to crude prices and the scale of the increase in July was well below what we saw in Q2, we think it is unlikely to have a meaningful impact."

A survey of British firms published last week showed they were planning smaller price and wage rises.

The BoE is expected to hold interest rates on Thursday.

It comes as consistent cooling in public inflation expectations reduces the likelihood of severe second-round wage-price spirals, easing pressure on the BoE as it weighs its upcoming interest rate decisions.