Runaway Inflation

The Bank of England released it’s quarterly inflation report today, and it paints a pretty gloomy picture. Inflation is set to exceed 3% for most of the rest of the year, obliging the Bank of England’s governor, Mervyn King, to write a series of explanatory letters to the Chancellor.

As part of their report, The Bank release a fan chart which projects the likely probabilities of a given inflation rate in future years. I thought it would be interesting to look back a few years and to see how accurate their projections were.

Thanks to the emergence of China as the world’s biggest manufacturer of goods, inflation was kept at bay during the late 90s and early 2000s, but at the beginning of 2005 it began to move upwards. The Bank’s central projection showed inflation rising above 2% during 2005 but falling back to below 2% in 2006.

Sure enough, it did do this. The Bank then projected a couple more blips above 2% before falling back to it’s 2% target in 2007…

Unfortunately, this time the Bank got it wrong, and rather than blip above 2%, inflation soared to 3%. The Bank thought this was only a temporary problem, and predicted that inflation would fall back to 2% by 2008.

Inflation did have a brief drop below 2% during 2007, but it now seems that’s its back well on its way toward 3% and beyond…

2 thoughts on “Runaway Inflation”

  1. Interesting fan charts – I’ve not seen those before. Do you notice how every chart predicts inflation to be at 2% in 4 years time? Seeing as this is their target, they would predict this wouldn’t they.

    I’m amazed how few “professionals” predicted the rise in inflation and the house price crash and the recession that we are entering into. We were so unprepared for this. I wonder how the Banks future inflation charts will look. A high of 5% inflation possible followed by deflation? This is going to be a rough ride.

  2. The bank attach these charts to every inflation report (along with a similar fan chart for GDP growth). They always predict themselves as being “on target” in 4 years time… pretty confident aren’t they (I guess they would have to be!).

    What’s really interesting is that the fans have increased in size. The spread was previously about 2% but now it’s almost 3% as we enter more uncertain times.

    Clearly the Bank didn’t take the inflation threat seriously enough though as we are now (in 2008) at 3% when they predicted we’d be at 2%.

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