The Bank of England are lousy forecasters
I was, needless to say, not terribly surprised by yesterday’s jump in inflation.
Many commentators clearly believe the Bank of England’s forecast that inflation will come down sharply during 2010.
This is not really my expectation – so long as this country is depending on imports, and so long as the pound continues to be weak, I can’t see inflation dropping significantly.
However, it wasn’t till I read this article by Hamish McRae that I realised how lousy the BoE have been at predicting inflation in the past:
A year ago the Bank thought that inflation by now would be close to 1 per cent. Indeed the very top end of its expected range for the CPI was 3 per cent. So it has been completely wrong. And it has been wrong despite the fact that the recession has been somewhat more severe than it expected then. We all make mistakes, but that was a big one.
Actually, the Bank has been consistently underestimating inflationary pressures for the past four years. I have been looking at some work by Simon Ward, the economist of the fund management group Henderson, and he points out that the CPI has gone up by 2.8 per cent a year over that period, not the 2 per cent target that the Bank was supposed to attain.
Unless they’ve changed their computer model significantly recently, I guess this means we shouldn’t trust their forecasts very much. The model has probably been designed for boom times, and it isn’t able to predict bust-time inflation with any degree of accuracy.
Anyway, let’s see. My prediction is that CPI inflation won’t fall below 2.5% throughout 2010. Who would you put your money on? The Bank of England or the Widmann Blog?
Imported inflation is what happens when the pound drops. It’s stunning how many who doesn’t get that. And if it didn’t happen it would be a really bad sign for the rest of the economy, since it would be deflating even when measured against a falling currency.
[Hei, Thomas. Lenge siden sist. Jeg dumpa egentlig bare innom for å si at jeg nevnte deg ved navn i går i en flåsete tråd på LanguageHat – som eksempel på en språkviter som har lært både georgisk og baskisk og fortsatt later til å ha en sunn sjel – og så begynte jeg å lese.]
Absolutely. And even more people don’t get that the inflation rate is affected directly by changes in VAT.
[Hej Trond! Ja, det er længe siden – jeg har stort set droppet Usenet – for mange af de interessante skribenter forsvandt. Sjov traad – jeg maa vist hellere give mit besyv med.]
Me included… Well, I knew it but I didn’t know there’d been a change in the British VAT level. And anyway, and if I’m not too mistaken, that’s a momentary effect with little impact on long-term inflation. And that may well be your point.
[Takk. Det løste du med bravur. Jeg angra litt på at jeg hadde dratt deg inn på den måten.]
No, my point is this.
[Ikke noget at undskylde. Det var en sjov tråd!]
Update: “Consumer price inflation was above 3pc throughout the first quarter, and the Bank was forced to concede last week that it had underestimated the short-term threat of inflation in previous forecasts. It has updated its forecasts to reflect above-target inflation throughout 2010.”
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