Holy Disinflation, Batman!
I’m still trying to stay intensely relaxed about the falling UK CPI rate. There is more than enough media coverage on that 1.9% number. What has not been so widely advertised is that the ECFIN Economic Sentiment Indicator rose in January to the highest level since 1997. The lesson of the last five years is that the CPI rate is not a good proxy for aggregate demand. Let’s not forget it!
For what it is worth, the Bank of England think monetary policy is a little too tight to hit their 2% inflation target on the two year horizon, where the median forecast is now 1.9%. And that is the way we should judge the stance of monetary policy under inflation forecast-targeting.