Inflation scares consumers

More than 80 per cent of consumers believe prices will rise in 2006, sparking fears that base rates will climb to combat inflation, according to the February Consumer Barometer from Lloyds TSB Financial Markets. Eighty-one per cent of consumers believe that prices in general will rise during the year, with only two per cent expecting them to fall. The balance - the percentage of consumers expecting rises minus those expecting falls - is, at 79 per cent, the highest it has been since the survey began in 20041. The rise in pessimism contradicts recent figures showing that CPI inflation eased to 1.9 per cent in January (the first time since May 2005 that it had slid below the Bank of England's two per cent target).

This may be because consumers are focusing on rapidly rising utility and transport costs rather than the benign overall picture. However, this outlook is in line with the BoE's recent Inflation Report and suggests that CPI inflation - and interest rates - may pick up later in the year.

In contrast with financial markets, which expect rates to remain unchanged, consumers expect base rates to rise during the year. Sixty-one per cent of consumers expect the cost of borrowing to increase in 2006 while just 12 per cent believe it will fall. The 49 per cent difference - a six per cent increase on January - represents the fifth time in six months that the balance has increased. Trevor Williams, chief economist at Lloyds TSB Financial Markets, says: "Inflation is below target at the moment but consumers are focusing on utility costs and energy prices when assessing the inflation outlook. Although they are looking at only part of the overall measure of prices, their outlook for price inflation is in line with the Bank of England's, which suggests that CPI inflation will rise later this year. "Consumers' take on the direction of short term official interest rates, therefore, seems to be right. The MPC is highly unlikely to cut rates in the foreseeable future, with all the evidence pointing to accelerating growth. Industries like manufacturing are seemingly set to turn the corner, so although it is quite a long time away we believe the next move in interest rates is likely to be up." Consumers also remain fairly uncertain about their jobs compared to last year, despite an overall rise in confidence.

Twenty-four per cent of consumers feel less secure about their jobs than a year ago while 22 per cent feel more secure. The balance of minus 2 per cent represents a fall from January - when it stood at 0 per cent - and takes the index back to its September 2005 level. In fact, consumers remain gloomy about employment prospects in general in the UK, with 36 per cent believing they have worsened over the last 12 months compared to just 18 per cent who believe they have improved. This is the second consecutive month that the balance has stood at minus 18 per cent.