UK expectations for inflation fall to four-year low

Consumers' expectations for inflation fell last month to the lowest level since May 2005, bolstering beliefs that interest rates will remain pegged at 0.5 per cent for a prolonged period.

Consumers expect inflation to drop to 2.1 per cent in the coming year, down from 2.8 per cent in November, the Bank of England's quarterly inflation survey showed. Consumers also said that they believed the rate of inflation had tumbled from 4.9 per cent to 4.2 per cent, the sharpest drop since the survey began nearly a decade ago. The fact that consumers do not see inflation dropping below the Bank's target of 2 per cent may go some way to easing fears that deflation will become a protracted problem for the economy.

However, some economists warned that the relief may be short-lived because expectations could fall sharply in the coming months.

The consumer prices index (CPI) measure of inflation has already tumbled to 3 per cent from a high of 5.2 per cent last September and the Bank's forecasts show that it will fall to near zero, remaining well below the 2 per cent target until 2012. The alternative retail prices index (RPI) gauge of inflation, which includes housing costs, has already plummeted to just 0.1 per cent, and is expected to drop below 0 per cent in the coming months, reflecting the decline in mortgage rates.

The Bank is likely to see the survey as further vindication for its decision to pump more money into the economy. Howard Archer, chief UK and European economist at IHS Global Insight, said that the data was "likely to reassure the Bank that quantitative easing is fully justified as the danger of an extended, deep recession outweighs inflation risks".

The Bank bought £2 billion in gilts with its newly created money on Wednesday and is poised to spend another £5 billion next week.

The dangers of a prolonged recession were highlighted as Experian, the credit reference agency, forecast that UK consumer spending was set to fall by 2 per cent this year. That rate would be twice as fast as the average drop predicted in other European countries.

The plight of savers, who have seen their returns plunge as the Bank has slashed interest rates to historic lows, was also underlined by the Bank's survey as nearly a third of consumers said they wanted rates to rise, up from 20 per cent of consumers in November, when rates were at 3 per cent. Asked what would be best for them, 30 per cent favoured a rate rise, while one in five said a rate increase would be "best for the economy".

The proportion of consumers who thought that the Bank was doing a satisfactory job fell to a record low. Only 10 per cent more people were satisfied than dissatisfied with the way the Bank was "doing its job to set interest rates and to control inflation", down from 19 per cent in November. This is the lowest figure recorded since the survey began.

This came as more dismal data from the UK housing market underlined the stagnation in mortgage lending. The number of home loans granted to buyers fell to a record low in January, figures from the Council of Mortgage Lenders showed. Only 23,400 mortgages were approved, down 52 per cent from January last year.

The number of loans granted to first-time buyers, who are crucial to the health of the housing market, also plummeted by 50 per cent to a record low of just 8,900.

There has been little reprieve for struggling housebuilders as official figures showed that new construction orders fell by 12 per cent in the three months to January compared with the previous quarter. The annual decline was 32 per cent.

City economists forecast that house prices, which have already fallen by 20 per cent since the market peaked in the summer of 2007, will fall by another 15 or 20 per cent this year, although one analyst has predicted an even more damaging slump. Numis Securities said earlier this week that prices could slump by 55 per cent.

The scale of house price falls was further illustrated as new figures from Globrix, the property website, showed that sellers in some towns had been forced to cut asking prices by more than a quarter in the past six months.

Source: http://business.timesonline.co.uk