Home > Bank of England, Inflation, Monetary Policy > May 2013 Inflation Report: Two Point Oh Not Again?

May 2013 Inflation Report: Two Point Oh Not Again?

In the February Inflation Report we saw the Bank forecasting (and hence, targeting) CPI inflation significantly above 2% on the two year horizon for the first time in four years.  In this week’s Inflation Report we saw the Bank revising up its real GDP forecasts for what Chris Giles says is the first time since 2007.  What a strange co-incidence that is, eh?

Claire Jones has a nice post covering the improvements to the Inflation Report prompted by the Stockton Review.  For the first time, I didn’t have to wait a week for the Bank to publish their sacred Excel spreadsheet with the forecast data.  Rejoice!  This graph shows how the median forecasts of the CPI rate have moved over the last four Inflation Reports:

Bank of England Median Forecasts for CPI

Bank of England Median Forecasts for the CPI Rate

The median forecasts have shifted down across the entire forecast period, since February, and now perfectly hit 2.0% CPI on the two year horizon (versus 2.3% in February on the same horizon).  The obvious response is to castigate the MPC for yet another opportunistic disinflation.  In this case I wonder whether the Bank’s models might only have altered the real/inflation split, since the real GDP forecasts have moved in the opposite direction to inflation; Chris’ post has the graph showing the latter.  It would be useful to have the forecast for the path of nominal GDP so we could identify such cases.

It is worth noting here that Mervyn King’s hawkish ITV interview in March seems to have “successfully” capped the rise in market inflation expectations seen earlier in the year, and put a floor under Sterling – at least the latter of these feeds in to the Bank’s forecasting model.  King declared in that interview that the pound was “close to properly valued” and insisted the Bank was not going soft on inflation.  Great work, Merv!

Sterling ERI and Market RPI Expectations. Source: Bank of England. Sterling Broad ERI , 5 Year RPI Implied Forward

Sterling Exchange Rate Index and Market RPI Expectations in 2013.
Source: BoE, Sterling Broad ERI , 5 Year RPI Implied Forward

(The sharp movement in market inflation expectations at the start of January is not a data error, it was caused by the outcome of the RPI methodology consultation.)

So the usual conclusions must be drawn… does the MPC want higher inflation?  No.  Are they constrained from moving inflation expectations?  No.  Have the MPC been desperately printing money to raise (or keep elevated!) expected growth and inflation since February?   No, no, no.

There is still room for a little hope; Carney might, just might, bring some improvement to policy.   Lars has some excellent suggestions.  In the mean time, well… things could be worse.

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