At the same time, UK firms expect overall inflation to keep cooling.
The Bank of England's Decision Maker Panel, or DMP, surveys chief financial officers to get a read on business thinking. The latest round, conducted from June 5 to June 19, shows 57% of firms said they would raise prices. That is down from 64% in April, but the planned average increase stayed at 4%.
Firms also expect their own workers to get bigger pay raises. The expected wage increase of 3.5% sits above the Bank of England's comfort zone for keeping inflation at its 2% target.
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Companies are trying to repair profit margins that got squeezed by earlier cost increases. Despite recent drops in energy costs, according to the survey.
Energy prices declined following reports that the US and Iran had agreed to resume operations in the Strait of Hormuz. That announcement caused oil prices to fall during the survey period. However, almost 40% of firms said the Iran war would have no impact on prices at all.
The Bank of England's Monetary Policy Committee, or MPC, is the group that sets interest rates. The MPC currently has divisions, with a small faction advocating for further rate increases while the rest prefer to maintain the present 3.75% level. Governor Andrew Bailey appears willing to keep rates at 3.75%.
The Bank of England faces a delicate balancing act. While headline inflation is cooling, businesses' pricing intentions and wage growth remain elevated, complicating the decision to hold or cut rates. The DMP survey, which polls CFOs of large UK firms, is closely watched as an indicator of future inflation trends. The slight recovery in employment expectations also suggests the labor market may be resilient, which could keep upward pressure on wages.
Matt Bunny and Dan Hanson, economists at Bloomberg Economics, said: "Inflation expectations eased further in June according to the Bank of England's closely watched Decision Maker Panel survey. The decline likely reflects the drop in energy prices over recent weeks and supports our view that the current bout of above-target inflation is unlikely to morph into a more persistent shock. The data add to the case for the BOE to keep rates on hold this year. Absent a resurgence in energy prices, we think a cut is the more likely direction of the central bank's next move."
The DMP survey indicated a modest uptick in hiring, with projected employment growth showing a positive figure in June, ending a trend that had been negative since February. Related article: BOE's Mann signals willingness to hike rates if inflation pressures continue.
The Bank of England's 2% inflation target remains the guiding benchmark, and the DMP survey serves as an early-warning system for persistent price pressures. With wage growth expectations of 3.5% sitting above the level the Bank of England sees as compatible with its 2% inflation target, the MPC must assess whether recent energy-driven disinflation is enough to offset stickier domestic costs. The survey's employment data, while improving, still points to a tight labor market that could feed into further wage demands. These factors reinforce the cautious stance of Governor Bailey and the majority of committee members, who prefer to hold rates at 3.75% until more concrete signs of easing emerge.
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