Inflation: Not a Petroleum Phenomenon
A quick post on this, this data deserves wider attention. You might expect that UK inflation expectations would have fallen recently, given the collapse in oil prices. You’d be wrong. This is the BoE data for this year for implied RPI from the gilt market.
UPDATE, January 2015: This data is wrong. See subsequent post.
(Reminder for non-Brits, expect the RPI rate to be roughly 1% above the CPI rate, 2% on the latter being the Bank’s actual target.)
That’s actually a very dovish (as in “high”) inflation forecast, when many forecasters are busy revising down their short-term inflation forecasts as the oil price falls. What are the markets seeing that the City scribblers have missed?
If we take the data as given… I could argue this one either way. On the one hand, an inflation-targeting central bank really should be judged on its success in stabilising the expected path of inflation. MPC members should be crowing about this data. On the other hand, we know that inflation-targeting central banks which try too hard to hit their targets in the face of large supply shocks tend to screw up time and time again.
So, let’s cheer a little, but perhaps quietly. I don’t see any reason to be concerned about near-term demand-side weakness as long as the the MPC continues to keep short-term inflation expectations steady in the face of a large supply-side disinflation.