Levels, Rates, and a Bump in the Road
The path of the UK CPI level was quite strange in 2011. It jumped up between January and April, then went flat; jumped up again between July and September, then flattened off again.
This means that the CPI rate in 2012 will be hard to interpret. Even if the CPI level followed a perfect log-linear path every month of 2012, up a 2% gradient, the annual CPI rate would bounce about because of the variation in the 2011 levels.
To illustrate this point, here is a graph showing how the CPI level moved through 2011, how it has moved so far in 2012, the MPC’s forecast from May, and also what a 2% rate would look like.
The July to September “ramp” in the 2011 CPI level was similar to what happened in the same period of 2008, but is otherwise an unsual pattern: the common factor in those years being an oil price spike.
Absent such a supply-side spike this year – or aggressive demand-side measures from the MPC, there might finally be a “downside surprise” on the inflation target. As in “surprise, demand growth really is weak”.