The latest BOE/Ipsos inflation attitudes survey for August 2025 reveals median expectations of inflation at 3.6% for the coming year, up from 3.2%. Median expectations for the following 12 months are 3.4%, an increase from 3.2%.
Rising Long Term Inflation Expectations
Long-term median expectations for inflation, projected in five years, stand at 3.8%, rising from 3.6%. The current 3.6% rate reflects the highest public inflation expectations since the same quarter two years ago.
These findings might point towards building risks related to stagflation within the UK economy.
This latest survey showing a rise in public inflation expectations should put us on alert. With the one-year forecast hitting 3.6%, a level we haven’t seen since the challenging period of August 2023, it signals that inflation may be becoming more entrenched in the public mindset. This complicates the Bank of England’s job significantly, especially as the latest official CPI data for August 2025 still shows inflation lingering at a stubborn 3.1%.
The Bank of England is now in a difficult position, as such expectations can become a self-fulfilling prophecy. This new data challenges the market’s current pricing, which, according to SONIA futures, has been leaning towards a potential rate cut by the second quarter of 2026. Consequently, we should consider positioning for a more hawkish BOE that either holds rates higher for longer or even contemplates another hike.
Strategic Implications for Traders
For interest rate traders, this suggests selling near-term sterling interest rate futures to bet against the market’s dovish assumptions. A more hawkish central bank will likely push short-term yields higher, making this a direct play on the changing outlook. This strategy is a response to the risk that the path to 2% inflation will be much slower than previously anticipated.
In the currency markets, this could provide a tailwind for the pound. If the BOE is forced to be more aggressive on rates than the Federal Reserve or the ECB, sterling could strengthen. We should look at buying GBP/USD or GBP/EUR call options to gain upside exposure to a stronger pound with managed risk.
For equity derivative traders, the growing mention of stagflation is a major warning sign. The combination of persistent inflation and potentially higher rates to combat it could hurt corporate earnings and economic growth. We should consider buying put options on the FTSE 250 index, which is more exposed to the domestic UK economy, as a hedge against a potential downturn.
