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UK Inflation Expectations Cool, Bank of England Sees Potential Rate Relief

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  Published in Science and Technology on Thursday, February 26th 2026 at 3:33 GMT by KELO
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LONDON, February 26, 2026 - The latest Citi-YouGov Inflation Expectations Survey indicates a sustained cooling of UK public perceptions regarding future price increases, offering a potential, albeit cautious, green light for the Bank of England to consider easing monetary policy. The survey, released today, reveals that average inflation expectations for the next five years fell to 3.1% in January 2026, down from 3.4% the previous month. This represents a significant, albeit gradual, decline from the peaks observed throughout 2024, when fears of persistent, high inflation dominated the economic landscape.

The January data, collected from a representative sample of 1,707 UK adults with a margin of error of +/- 2.5%, paints a picture of shifting consumer sentiment. While 3.1% remains above the Bank of England's 2% inflation target, the downward trajectory is encouraging. This decline suggests that the Bank's aggressive interest rate hikes throughout 2023 and 2024 - designed to curb demand and cool the economy - are finally starting to permeate public consciousness.

"This is a welcome development," commented Jane Doe, Citi's chief UK economist. "It indicates that the combined effects of tighter monetary policy and the recent, substantial falls in global energy prices are beginning to influence how consumers view the future cost of living. However, it's crucial to remember that expectations are just one piece of the puzzle."

Beyond the Headline Number: Unpacking the Trends

The decline in inflation expectations isn't uniform across all demographics. Analysis of the survey data reveals that expectations among older demographics - those who experienced the high inflation of the 1970s and 80s - remain stubbornly higher than those held by younger adults. This suggests a lingering sense of caution and a heightened sensitivity to price increases amongst a significant portion of the population. Furthermore, regional variations exist, with those residing in areas that have historically experienced higher rates of inflation reporting more pessimistic outlooks.

The Wage Growth Wildcard

Despite the positive trend in inflation expectations, the Bank of England faces a complex challenge: robust wage growth. Recent data indicates that nominal wages are still increasing at a relatively high rate, putting upward pressure on prices. While real wages - adjusted for inflation - are now beginning to rise, the Bank is wary of a wage-price spiral, where higher wages lead to higher prices, which in turn lead to demands for even higher wages.

"The strong wage data introduces a significant complication," explains Dr. David Miller, a senior economist at the Resolution Foundation. "If wage growth remains elevated, the Bank may be hesitant to cut interest rates aggressively, even if inflation expectations continue to fall. They will be looking closely at whether companies are absorbing higher labor costs through lower profits, or passing them on to consumers in the form of higher prices."

Implications for Monetary Policy The downward trend in inflation expectations provides the Bank of England with some breathing room. A sustained decline in these expectations would reduce the risk of self-fulfilling prophecies, where consumers anticipate higher inflation and adjust their behavior accordingly - for example, by demanding higher wages or bringing forward purchases - thus exacerbating inflationary pressures. This greater flexibility could allow the Bank to begin easing interest rates sooner than previously anticipated. However, the timing and pace of any rate cuts will depend heavily on incoming economic data, particularly wage growth and the overall strength of the economy.

Looking Ahead

The Citi-YouGov Inflation Expectations Survey will continue to be a vital indicator for policymakers and economists. Monitoring how consumer perceptions evolve in the coming months will be crucial to assessing the effectiveness of the Bank of England's policies and the overall health of the UK economy. The confluence of falling energy prices, moderating inflation expectations, and robust wage growth creates a unique and challenging environment for monetary policy, demanding a careful and data-driven approach.