By James Benford of the Bank's Monetary Assessment and Strategy Division and Ronnie Driver of the Bank's Inflation Report and Bulletin Division.
A key upside risk to the medium-term outlook for inflation stems from the possibility that a further period of above-target inflation could lead to persistently elevated inflation expectations. According to the Bank/GfK NOP survey, households' expectations for inflation over the next year have risen markedly. This article focuses on the factors which may have driven the increase, drawing on the results of some additional questions included in the February 2008 survey. It concludes that while the latest increases in households' inflation expectations could be consistent with recent macroeconomic data, increases in households' perceptions of current inflation may also have played some role. The article also summarises the public's attitudes to interest rates and the conduct of monetary policy.