Recurring Failure
Here is the graph of the headline UK CPI rate, and the Bank of England’s median forecast for the CPI rate looking 3 years out. The latter is a roughly what the MPC aim to adjust when setting the monetary policy stance, as per Lars Svensson’s “target the forecast” methodology. If the forecast is nailed to 2%, go and watch the tennis. Otherwise, adjust the monetary policy stance until the forecast is at 2%.
The last recession, and the ongoing double-dip are shaded.
UK CPI Rate, Current and Forecast
Is it chance that the failure to hold the forecast at 2% was preceded both times by a spike up to 5% on the current CPI rate?
And then.. is it chance that both episodes of failure are associated with a recession? Correlation, but no causation? Admittedly it would better to look at some measure of nominal demand growth here, not just falling real GDP.
