The latest BOE/Ipsos inflation attitudes survey for August 2025 shows that people expect inflation to rise to 3.6% in the next year, up from 3.2%. For the following 12 months, expectations are at 3.4%, also an increase from 3.2%.

Rising Long-Term Inflation Expectations

Long-term expectations for inflation over the next five years are at 3.8%, up from 3.6%. This 3.6% rate reflects the highest public inflation outlook since the same time two years ago. These results may indicate growing risks of stagflation in the UK economy. The rise in public inflation expectations should raise concerns. With the one-year forecast hitting 3.6%, a level we haven’t seen since August 2023, it suggests that people are starting to accept higher inflation as a norm. This makes the Bank of England’s job even more challenging, especially since the latest official CPI data for August 2025 still shows inflation at a stubborn 3.1%. The Bank of England now faces a tough situation. Expectations like these can become a self-fulfilling prophecy. This new information disrupts market pricing, as seen in SONIA futures, which had initially tilted towards a possible rate cut by the second quarter of 2026. As a result, we might need to prepare for a more aggressive Bank of England that could keep rates higher for longer or even raise them again.

Strategic Implications for Traders

For interest rate traders, this means selling near-term sterling interest rate futures to challenge the market’s relaxed views. A more aggressive central bank is likely to push short-term yields up, making this a direct response to the changing outlook. This strategy addresses the risk that reaching 2% inflation will take longer than expected. In the currency market, this could boost the pound. If the Bank of England needs to be tougher on rates than the Federal Reserve or the ECB, sterling could strengthen. We should consider buying GBP/USD or GBP/EUR call options to benefit from a stronger pound while managing risk. For equity derivative traders, increased talk of stagflation is a significant warning. Persistent inflation combined with higher rates could hurt corporate profits and economic growth. As a precaution against a potential downturn, we should look at buying put options on the FTSE 250 index, which is more tied to the UK economy. Create your live VT Markets account and start trading now.

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