Businesses Sharply Raise Inflation Expectations as Energy Crisis Bites
The Bank of England has issued a stark warning that businesses across the United Kingdom are bracing for a significant surge in inflation, according to its latest closely-watched monthly survey. The findings reveal that corporate inflation expectations shot up dramatically in March, reversing a gradual decline observed over previous months.
Survey Reveals Sharp Reversal in Inflation Outlook
The Bank's decision makers' panel, which polls thousands of executives monthly, found that the average expected inflation rate for the coming year increased by nearly 0.4 percentage points compared to February's figures. This marks a concerning reversal from the gradual decline that had seen expectations fall from 3.7 percent in October to 3.3 percent earlier this year.
The new data shows business expectations have returned to levels last seen in autumn 2025, indicating growing pessimism about price stability. Firms reported experiencing higher inflation in the year to March than in the previous month, suggesting business owners are already feeling the squeeze from rising costs.
Energy Crisis Drives Inflation Fears
The primary driver behind this shift appears to be the escalating conflict in Iran and its impact on global energy markets. While the Ofgem energy price cap will protect household bills from the worst effects until July, businesses face immediate pressure as many operate on variable energy rates that have already begun to soar.
Manufacturers have been particularly hard hit, with Wednesday's data revealing input cost inflation rising at its fastest pace since 1992. The situation is compounded by uncapped fuel prices that are hitting motorists nationwide, creating broader inflationary pressures throughout the economy.
Monetary Policy Implications
Policymakers at the Bank of England are likely to view these developments with considerable concern. Higher business inflation expectations could become self-fulfilling, as companies adjust pricing strategies and wage negotiations in anticipation of continued price increases.
Minutes from the Monetary Policy Committee's most recent meeting revealed members standing "ready to act," fueling market speculation about potential interest rate hikes. Economists at JP Morgan have predicted there could be two rate increases, while two-year gilt yields jumped to 4.4 percent on fears that the Iran conflict could prolong economic disruption.
Current interest rates stand at 3.75 percent, but market indicators suggest investors anticipate further tightening. Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, noted that while some MPC members might take comfort from a slight fall in wage growth expectations, risks remain substantial.
Broader Economic Concerns
"The more dovish members on the MPC will likely be tempted to discount that increase as news-driven noise for now," Jordan-Doak commented. "But rate setters will be acutely aware of other measures of households' inflation expectations jumping recently—like YouGov's one-year-ahead measure surging 200 basis points—so risks of second-round effects will remain a major worry."
The economist added that evidence suggests "the risk of hikes in 2026 is greater than cuts," particularly given President Trump's recent address indicating disruptions to energy markets and supply chains would persist. This assessment aligns with the survey data showing businesses' expectations beginning to rise after households' expectations had already jumped sharply.
The Bank of England now faces the delicate balancing act of containing inflation expectations while avoiding excessive tightening that could damage economic recovery. With businesses signaling growing concern about price stability, monetary policymakers may need to reassess their approach in coming months.
