M&G YouGov Inflation Expectations Survey · YouGov is an international market research agency with sector specialist teams serving the financial, media, technology and telecom industries

M&G YouGov Inflation Expectations Survey

Q2 2013

1 year ahead (%)

Austria France Germany Hong Kong Italy Singapore Spain Switzerland UK

Feb 13 – 2.5 2.5 5.0 3.0 4.6 3.3 1.2 3.0

May 13 2.8 2.0 2.2 5.0 3.0 4.0 3.0 1.5 2.7

5 years ahead (%)


Feb 13 – 4.0 3.5 5.0 3.3 5.0 4.0 2.5 3.0

May 13 3.0 3.0 3.0 5.8 3.0 5.0 3.0 2.6 3.0

Most recent HICP/CPI (y/y %)1


2.4 0.9 1.6 3.9 1.3 1.5 1.8 -0.5 2.7

The results of the May 2013 M&G YouGov Inflation Expectations Survey suggest that consumers in most countries surveyed expect inflation to be elevated above current levels in both one and five years’ time. In the UK, inflation is expected to be above the Bank of England’s CPI target of 2.0% on a one- and five-year ahead basis. All EMU countries surveyed expect inflation to be equal to or higher than the European Central Bank’s CPI target of 2.0% on a one- and five-year ahead basis. All countries expect inflation to be higher in five years than currently, while four – Hong Kong, Italy, Singapore

and Spain – anticipate it being equal to or higher than 3.0% in a year.

Comparing the May survey results to those from February 2013 produces some interesting results. In France, Germany, Singapore, Spain and the UK, inflation expectations for one-year ahead have fallen. This is unsurprising given commodity price2 returns have declined by roughly 7% since the end of January 2013. Consumers have also benefitted from a 6% fall in the oil price3 over the same time period.

Executive summaryConsumers have little confidence that inflation will decline below current levels in either the short or medium term, according to the M&G YouGov Inflation Expectations Survey. In the UK and Europe, inflation is expected to be persistently above central bank targets, a sign that consumers lack confidence in policymakers’ effectiveness. However, there are some indications that inflationary pressures may be starting to wane.

Inflation expectations

1

M&G’s Retail Fixed Interest team has conducted the analysis of the first and second questions.1 Source: Bloomberg, as at 20.06.13.2 TR/J CRB Commodity Excess Return Index 31.01.13-31.05.13.3 WTI Cushing Crude Oil Spot Price 31.01.13-31.05.13.

2

Survey respondents in France, Germany, Italy and Spain have also lowered their inflation expectations over five years. While medium-term inflation expectations in the UK are stable at

3.0%, they remain above the Bank of England’s inflation target of 2.0%. Hong Kong and Singapore inflation expectations remain high at 5.8% and 5.0% respectively.

Other highlights include:

• The majority of respondents in France, Hong Kong, Italy, Singapore, Spain and the UK stated that rising inflation was a concern for them and their families at the moment.

• In France, Italy and Spain, the most popular response amongst survey respondents when asked about their personal income was that they expected their net income to be lower in 12 months’ time than it is now.

• The majority of respondents in all regions except Singapore and Switzerland are not confident that their respective central bank is currently pursuing the correct policies to meet or achieve price stability over the medium term.

• The most popular response regarding government economic policy in France, Italy, Spain and the UK was that survey participants disagreed that their government is currently following the right economic policies.

M&G YouGovInflation Expectations Survey

Inflation expectations

Consumer inflation expectations remain above central bank targets in most countries.

Consumers in France, Germany, Singapore, Spain, and the UK reported a lowering of inflation expectations in the short term.

In the UK and Europe, medium-term inflation expectations remain above the Bank of England and European Central Bank’s inflation targets.

2

1

3

4

5

0

7

6

Austria

%

France Germany Hong Kong Italy Singapore Spain Switzerland UK

May 13Feb 13

Inflation expectations – 5 years ahead

3.00 3.00

3.50

3.003.30

3.00

4.00

3.003.002.602.50

5.005.00

5.80

5.00

3.00

4.00

2

1

3

4

5

0

6

Austria

%


May 13Feb 13

Inflation expectations – 1 year ahead

2.75

2.00

2.502.20

2.50

5.005.00

3.003.00

4.00

4.55

3.003.30

1.501.20

2.653.00

2

1

3

4

5

6

0

7

Austria

3.002.75

2.00

3.00

2.20

3.00

5.00

5.80

3.00 3.00

4.00

5.00

3.00 3.00

1.50

2.60 2.653.00

%


5 years ahead1 year ahead

Inflation expectations – May 2013

3

1. What annual rate of inflation do you expect 12 months from now?

2. What annual rate of inflation do you expect five years from now?

Statistical Appendix

4

Interquartile 25th 75th range Don’t know Sample size Median percentile percentile (75th-25th) responses

Austria 500 2.75 2.00 3.33 1.33 26.80%

France 1,008 2.00 1.00 3.00 2.00 45.93%

Germany 1,050 2.20 1.60 3.20 1.60 30.00%

Hong Kong 514 5.00 4.00 6.00 2.00 17.12%

Italy 1,002 3.00 2.00 5.00 3.00 32.34%

Singapore 535 4.00 3.00 5.00 2.00 23.18%

Spain 1,002 3.00 2.00 5.08 3.08 34.93%

Switzerland 517 1.50 0.60 2.20 1.60 38.88%

UK 2,089 2.65 2.00 3.00 1.00 41.12%

Interquartile 25th 75th range Don’t know Sample size Median percentile percentile (75th-25th) responses

Austria 500 3.00 2.20 5.00 2.80 28.60%

France 1,008 3.00 1.90 6.00 4.10 50.10%

Germany 1,050 3.00 2.20 5.00 2.80 34.29%

Hong Kong 514 5.80 4.50 10.00 5.50 18.48%

Italy 1,002 3.00 2.00 5.55 3.55 36.03%

Singapore 535 5.00 3.00 6.38 3.38 23.74%

Spain 1,002 3.00 2.00 6.60 4.60 39.02%

Switzerland 517 2.60 1.20 5.00 3.80 40.62%

UK 2,089 3.00 2.00 4.50 2.50 48.73%

40

30

20

50

10

0

60

Tend to agree Neither agree nor disagreeStrongly agree

Strongly disagree Don’t knowTend to disagree

%


40

30

20

50

10

0

60

I think my net income will increase over the next 12 months

I think my net income will be about the same over the next 12 months

I think my net income will decrease over the next 12 months

Don’t know Not applicable – I don’t have a net income

%


3. To what extent do you agree or disagree with the following statement? “Rising inflation is giving me and my family cause for concern at the moment.”

4. Thinking about the next 12 months – do you expect your net income to increase, decrease or be about the same in 12 months’ time?

5

The majority of respondents in France, Hong Kong, Italy, Singapore, Spain and the UK stated that rising inflation was currently a concern for them and their families.

In France, Italy and Spain, the most popular response amongst survey respondents was that they expected their net income to be lower in 12 months’ time.

40

30

20

50

10

0

60

Fairly confident Not very confidentVery confident

Don’t knowNot at all confident

%


40

30

20

50

10

0

60

Tend to agree Neither agree nor disagreeStrongly agree

Strongly disagree Don’t knowTend to disagree

%


5. How confident, if at all, are you that your central bank is currently pursuing the correct policies in order to meet its target of price stability (ie inflation around 2%) over the medium term (ie the next 3-5 years)?

6. To what extent do you agree or disagree with the following statement? “I think that my government is currently following the right economic policies.”

6

The majority of respondents in all regions except Singapore and Switzerland are not confident that their respective central bank is currently pursuing the correct policies to achieve price stability over the medium term.

The most popular response to question six in France, Italy, Spain and the UK was that survey participants do not believe their government is currently following the right economic policies.

The majority of respondents in all regions except Singapore and Switzerland are not confident that their respective central bank is currently pursuing the correct policies to achieve price stability over the medium term.

The most popular response to question six in France, Italy, Spain and the UK was that survey participants do not believe their government is currently following the right economic policies.

Inflation expectationsmethodology

M&G’s Retail Fixed Interest team analyses the statistics for the answers to the first and second questions in the survey (ie, the expected annual inflation rates in 12 months and 5 years from now). To achieve this, all answers are first ranked in ascending order, and several percentiles are subsequently determined. In this context, percentiles are expected inflation rates below which a certain percentage of responses can be found. For instance, the 50th percentile, the so-called median, is the middle value of the distribution, dividing the data set into a lower and an upper 50%. If there is an even number of values, the median is determined by calculating the average of the two middle values. In the statistical analysis of the survey, we have chosen to use the median rather than the arithmetic mean because this is less affected by extreme values. To determine the dispersion of answers, the difference between the 75th and 25th

percentiles is taken. Finally, the number of ‘don’t know’ responses is divided by the total number of responses and the resultant percentage is recorded as an indicator of respondents’ level of uncertainty around inflation. Data processing for the remaining questions (three to six) is conducted by YouGov. Here, percentage values are calculated for each answer option by dividing the number of respective responses by the total number of responses.

The content of this report should not be regarded as a recommendation, advice or forecast regarding inflation expectations.

GlossaryInflation: the rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier.

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Issued by M&G Securities Limited and M&G International Investments Limited. Both are authorised and regulated by the Financial Conduct Authority in the UK and have their registered offices at Laurence Pountney Hill, London EC4R 0HH. JUN 13 / W43992 8

Who is YouGov?YouGov is an international market research agency with sector specialist teams serving the financial, media, technology and telecom industries. They are considered a pioneer of online market research and are the most quoted market research agency in the UK. In August 2012, they were named as one of the world’s top 25 research companies by the Honomichi Top 25 Global Firms.

For quantitative research, YouGov uses an online panel of adults, who are profiled across a range of demographic, attitudinal, lifestyle and marketing characteristics. The emphasis is put on quality rather than quantity and restrictions are put in place to ensure that only those selected from this panel are able to take part in the survey.

Cash incentives are used to encourage participation and prevent an overwhelming influence from those with a particular interest or ‘axe to grind’. In the UK, France and Germany, the panels are constructed by YouGov and consist of over 360,000, 77,000 and 180,000 adults respectively. In the other countries, a panel partner of YouGov conducts the survey using an online interview. The panel sizes for these countries are as follows: Austria (17,995), Hong Kong (15,048), Italy (101,164), Singapore (20,762), Spain (103,493) and Switzerland (14,458).

For qualitative research, they use online forums, face to face focus groups and cognitive interviews. This information is then either used stand alone or is fully integrated with their quantitative research.

Once collected, the data is weighted using either each country’s census, if available, or industry accepted data, to help make the sample as reflective of the general population as possible.

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M&G YouGov Inflation Expectations Survey · YouGov is an international market research agency with sector specialist teams serving the financial, media, technology and telecom industries