Investing.com -- U.K. inflation is on the rise and it may continue on that trajectory throughout 2025, according to Deutsche Bank’s economist Sanjay Raja.
The recent Bank of England (BoE) data and this week’s Citi/YouGov index both indicated a rise in short-term and long-term inflation expectations to 3.9%, surpassing their long-term averages.
Raja says the U.K. Monetary Policy Committee (MPC) is monitoring this uptick, with medium-term gauges climbing to levels "a little above what could be explained by observed
moves in the equivalent short-term measure,” the committee said.
He forecasts that short-term inflation expectations will hover around 4% for the majority of the year, driven by anticipated increases in food and energy prices, as well as the overall Consumer Price Index (CPI).
“We see both short-term and long-term inflation expectations staying elevated across the remainder of 2025 – and sticking above their long-run averages,” Raja said.
“This, all else equal, will continue to add to the MPC’s worries around second-round effects,” he added.
Deutsche Bank (ETR:DBKGn) expects the MPC to lower the Bank Rate multiple times throughout the year, assuming a continued relaxation of the labor market. However, the firm also cautions that there is a risk of a halt in the easing cycle.
The anticipated leap in CPI and inflation expectations may prompt the MPC to pause rate cuts until it gains more insight into the 2026 pay settlements later in the year, presenting “one-sided risks” for the U.K. economy, according to Raja.
Published last week, the BoE/Ipsos measure of households’ inflation expectations for the coming 12 months climbed to 3.4% in February, the highest figure since August 2023.
The BoE said on Thursday that business expectations for consumer price inflation edged higher at the beginning of the year, according to its Decision Maker Panel survey.