Charles Dickens wrote Great Expectations, one of my favourites of his, but unless I missed it, the great man never touched on inflation expectations, which are currently exercising the Bank of England. And if you think that is a groan-worthy link, you are probably right, although Dickens did have Bank of England connections, once featuring on the £10 note, having several accounts there during his lifetime and including a scene set in its Consol’s Office in The Pickwick Papers.

Anyway, it is time to leave Pip and Samuel Pickwick behind and return to those inflation expectations. Last week, as you will recall, the Bank’s monetary policy committee (MPC) left official interest rates unchanged at 4 per cent. It was perhaps one of the least surprising decisions in the 28 years of Bank independence.

Some saw the decision as simply the result of the fact that inflation, now 3.8 per cent and set to go a little higher when this month’s figures are released on October 22, is too high for comfort. It is, but what matters for the MPC is where inflation is going, not where it has been.

This is where expectations come in. If people expect high inflation, the danger is that they will get it. And that, indeed, is what they expect.

As the Bank put it in the minutes of last week’s meeting: “Households’ short and medium-term inflation expectations had remained elevated relative to historical averages, likely reflecting a heightened attentiveness to the rise in headline CPI [consumer prices index] inflation in recent months, and particularly in food items.

“The Citi/YouGov measure of median one-year-ahead inflation expectations had remained at 4 per cent while the Bank/Ipsos measure had increased to 3.6 per cent. Both medium-term measures were elevated. In particular, the Bank/Ipsos measure had increased to a series-high of 3.8 per cent.”

For the seven MPC members who voted to keep interest rates on hold, these “elevated” inflation expectations were a key reason for caution. Why? Though we sometimes talk about the wisdom of crowds, people can be wrong and often are. Their expectations about future inflation usually straightforwardly reflect recent experience, not any special forecasting gifts.

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How are these expectations determined? Every three months Ipsos, a leading polling company, asks a sample of more than 2,000 people a range of questions on behalf of the Bank. Ipsos has been doing it for the past three years, succeeding another firm, Kantar. The survey has been conducted since shortly after independence in 1997.

Some of the answers are interesting. There is net satisfaction now with the way the Bank is doing its job, which was not the case a couple of years ago. Looking back, it took a while in the early days before people got used to the idea that the Bank set UK interest rates — there was always a tiny minority thinking that the European Central Bank did so and a bigger minority believing it was still the government — but that has changed.

On inflation, people are asked how much they think prices will rise over the next 12 months and the next five years, in ranges running from less than 1 per cent to more than 5 per cent, and from those answers, median expectations are determined.

In August, the most recent survey, the median for the next 12 months was 3.6 per cent, for five years 3.8 per cent, the latter the highest ever. In November 2022, when inflation was running at close to 11 per cent, the 12-month expectation was 4.8 per cent, but the five-year only 3.3 per cent. The fact that it is higher now is, as the MPC noted, concerning.

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There are two reasons why policymakers worry about these inflation expectations. The first is that the more that people expect inflation to stay high, the more that they will seek compensation in higher pay increases. One of the Bank’s key worries is that the growth in wages and salaries is too strong to be consistent with getting inflation back to the official 2 per cent target.

Average earnings growth of 4.8 per cent is well above the level consistent with the target. The Bank hopes and expects private sector regular pay growth to slow to 3.75 per cent by the end of the year and to fall further next year.

Heightened inflation expectations are a significant risk to that. The MPC is fretting about what it describes as “possible structural changes in price and wage-setting behaviour”, which may mean that pay does not slow as much as it hopes. That could include, as the governor Andrew Bailey has warned, the impact of higher employment taxes and minimum wage rises, including the chancellor’s rise in employer national insurance.

There is a second factor, which is also important. For many years in the UK, a popular economic narrative was one in which firms lacked pricing power, because of competition and price resistance from consumers. If businesses raised their prices too much, they would suffer.

This all could have changed if, as a result of the high inflation experience of the past four years, by modern standards, people regard significant price rises as normal. Their resistance could have weakened. Worse, people could get into the habit of buying before prices rise again, a feature of times of high inflation.

The jury is out on this one. People expect food prices to keep rising, as they have been, and they cannot stop buying food. Genuine supermarket price wars appear to be a thing of the past.

For other spending, however, consumers are cautious. Consumer spending has been a drag on growth in recent years, rather than a driver of it. Retail sales volumes are still around 10 per cent lower than in the spring of 2021, at the end of the final Covid lockdown, and have risen by only 0.7 per cent over the past year. Inflation, particularly for essentials, may still be holding people back, despite those high expectations.

David Smith is the economics editor of The Sunday Times