It is looking pretty dicey for the Bank and it’s inflation-fighting reputation. Read Jeremy Warner (Does the inflation target actually mean anything any more?) and above all the point made clear in Simon Ward’s post yesterday (UK CPI inflation 3 percentage points above BoE year-ago forecast). Here is a graph from last year’s May Inflation Report:
One quick observation: the prediction was based on 125bn of QE. We have had 75bn more than that, which must have had some effect on inflation (though as I droned on in Credit Where It’s Due, the mechanisms are rather wobbly and demand-dependent).
Another is: how on earth did they make such a prediction when they knew VAT would be returning? Did they simply miss it out? the April CPIY index stands at 112.8, which is 2.1 points above the April 09 level of 110.7, or almost exactly 2 per cent higher. This would put the forecast error down to 1 per cent. But if it WAS CPI without tax which they were forecasting, they didn’t tell us. I see a straight mistake.
A third observation is that Britain’s inflation is a bit of an exception within Europe. See the charts from Wolf’s (rather boilerplate) post today:
A final observation (coz I have to go to lunch) is this: if the Bank has made a mistake, I would rather it made this one than the other one. Reading Chris Giles today about what this means for you and me, it comes down to this: it makes living standards go down, but it may help make the budget deficit lower. And so far households are not expecting it to last. In other words, a one off transfer, lightening the biggest problem (government debt) and making all of us fairly evenly contribute to the problem.
This crisis needs measures OF THAT SORT to get the country back in balance: lower government debt, lower living standards. (We could also do with being more competitive, which this doesn’t help, but weak sterling manages that). Though I look like a hubristic fool to some (even though I stand by my points about Base Effects), actual deflation to such an indebted country suffering from insufficient demand may have been worse.