Why UK Firms Keep Raising Prices Even as Inflation Expectations Fall

UK companies think inflation's going to ease up over the next year. They expect consumer prices to rise about 3.3%, down from 3.7% last month. But here's the weird part: they're still planning to raise their own prices by 4%, which is double the Bank of England's 2% target.

That gap between what firms expect inflation to do and what they're actually doing with their own prices is the whole story here. The Bank of England's Decision Maker Panel survey from early June shows this split pretty clearly, and it's the kind of thing that makes central bank policy decisions messy.

The survey ran from June 5 to June 19, which caught the announcement about the US-Iran deal to reopen the Strait of Hormuz. Oil prices dropped hard on that news, and suddenly everyone's recalculating what peak inflation might actually look like. But firms are still pushing prices up because their margins got hammered over the past year and they're trying to rebuild.

The immediate reaction to lower energy prices showed up in how firms think they'll handle cost shocks going forward. Only 57% now say they'll raise prices in response to an energy shock, down from 64% in April. Almost 40% say energy costs won't impact their pricing at all, which is a pretty big shift in just two months.

That's the optimistic part. Energy prices falling means less pressure to push costs onto customers, and it supports the idea that this inflation spike won't turn into something more permanent. If energy stays stable or keeps dropping, the case for inflation coming back down to target gets stronger.

But the actual pricing behavior hasn't caught up yet. Firms are still planning 4% price increases for the year ahead, unchanged from last month. The reason is pretty straightforward: profit margins are still compressed from absorbing cost increases earlier, and now that they've got some room, they're taking it.

The other piece that matters for the Bank of England is wages. Firms expect wages to rise 3.5% over the next year, up from 3.4% in May. That's above what the BOE thinks is compatible with hitting the 2% inflation target, which means the wage-price feedback loop is still active.

Here's how that loop works in practice. Companies face higher costs, including labor costs. They raise prices to cover those costs. Workers see prices going up and push for higher wages. Companies then face higher labor costs again, and the cycle continues. Breaking that loop is what central banks care about most when they're trying to get inflation under control.

The survey data suggests it's not breaking yet. Wages are still climbing, firms are still raising prices, and even though everyone's more optimistic about inflation coming down, the actual mechanics on the ground haven't shifted. The employment picture even improved a bit, with expected employment growth turning positive in June for the first time since February.

For traders watching GBP pairs or UK equities, this is the structural piece that matters. The Bank of England's looking at this data and trying to figure out whether to hike rates again or hold steady. The Monetary Policy Committee's already split, with some members wanting to hike and others, including Governor Andrew Bailey, apparently comfortable holding at 3.75%.

The path forward depends on whether firms actually follow through with those 4% price increases or if competition and weaker demand force them to back off. If prices keep climbing while inflation expectations fall, that's a signal the transmission mechanism from costs to prices is still working, just with a lag.

The base case from economists watching this data is that the BOE holds rates where they are for now, and if energy prices stay stable, the next move is probably a cut, not a hike. That makes sense if you think the current inflation is mostly a supply shock that's already reversing, not a demand problem that needs monetary tightening to fix.

But the wage data and the actual pricing behavior from firms complicate that story. If wages keep climbing and firms keep raising prices, inflation could stay above target longer than the expectation surveys suggest. That's the risk the BOE's weighing right now.

For understanding how central bank decisions impact market structure, this kind of survey data is as important as the actual CPI prints. It shows you what's baked into business decisions right now, which eventually shows up in the economic data months later. The lag between expectation and reality is where the risk lives.

The biggest risk is that energy prices reverse. If oil spikes again because the Iran situation deteriorates or something else disrupts supply, all these declining inflation expectations get thrown out. Firms that were starting to pull back on price increases would immediately push them through again, and the BOE would be back to considering rate hikes.

The second risk is that the wage-price loop gains momentum instead of breaking. If workers successfully push for wage increases above 3.5%, and firms pass those costs through without much resistance, you get a self-reinforcing cycle that's hard to stop without a recession. That's the scenario where the BOE ends up hiking rates higher and holding them there longer than anyone expects.

The third risk is that firms are just wrong about their pricing power. If they try to push through 4% increases and customers push back or switch to competitors, those plans get scrapped pretty quickly. That would actually be good for inflation, but it's bad for corporate margins and potentially for employment if firms have to cut costs instead.

What's clear from the survey is that there's tension between what companies expect inflation to do and what they're actually doing with their own pricing. That gap has to resolve somehow, either through firms backing off their price increases or through inflation expectations rising again to match actual behavior. Which way it goes determines whether the BOE's next move is a cut or a hike.