Inflation fears as Bank ‘gets it wrong’

A report published today by the Centre for Policy Studies shows that the Bank’s predictions have been getting worse over the past four years as it consistently underestimates inflation.

This is in sharp contrast with the start of the decade when its forecasts were “almost spot on”.

In the 12 quarterly inflation reports from August 2001 to May 2004, the Bank’s average forecast for inflation a year ahead was 2.2 per cent while the eventual outturn inflation was 2.3 per cent. In this time the bank was just 0.1 per cent out.

From August 2004 to May 2007, the Bank’s average forecast for inflation a year ahead was 1.9 per cent against an actual figure of 2.3 per cent giving an error of 0.4 per cent. The Centre for Policy Studies said that although this was less accurate than the three years earlier it was “still within normal forecasting margins”.

However, in the 12 quarterly inflation reports from August 2007 to May 2010, the Bank’s average forecast for inflation a year ahead has been 1.9 per cent, when the actual figure has been 3.2 per cent.

Today’s report describes the 1.3 per cent difference between their forecast and actual inflation to be a “significant error”.

The Centre for Policy Studies economist Ryan Bourne said: “The problem this creates is that if people regard their predictions as incredible then even if the Bank of England predicts that inflation will drop back down people will still be expecting big increases.

“This creates inflationary pressures as if unions are expecting four per cent inflation rates they will ask for four per cent pay rises and consumers will spend the extra income. It creates an inflationary cycle which can be very difficult for the country to get out of.”