From the TUC

Does the OBR believe the Bank will keep control of inflation?

29 Nov 2011, by in Economics

The Office of Budget Responsibility has given a broad hint that the Bank of England’s inflation forecast is too optimistic. In it’s most recent Inflation Report, the Bank said that

Inflation was thought to be around its peak and was set to fall back sharply through 2012.

After that, the Bank admits that there is a great deal of uncertainty, but the MPC’s “best collective judgement” is that

inflation is more likely to be below than above the 2% target at the forecast horizon [2013]

The Bank measures inflation by the Consumer Price Index. Now, that formulation may strike you as a masterpiece of bureaucratic draftsmanship, but how persuasive has the Office for Budget Responsibility found it?

Of course, the OBR cannot say that CPI inflation will be over 2%. The Monetary Policy Committee has a responsibility to get inflation down to that level and saying that it would be higher would be tantamount to saying that the BoE policies on quantitative easing and interest rates are unjustified. This would throw the government’s economic strategy up in the air and the other assumptions on which the OBR’s forecasts are based.

But they face no such constraints when it comes to forecasting the Retail Price Index. Which makes table 3.6 of the OBR Economic and Fiscal Outlook very interesting:

Look at the years 2014 – 16: RPI changes over time, much as you might expect – straying upwards somewhat. CPI remains miraculously at 2.0% in each year. Duncan has already noted how the OBR has implicitly said that the Chancellor’s growth strategy will have little effect. It also looks as though they’re dissing Big Merv.

3 Responses to Does the OBR believe the Bank will keep control of inflation?

  1. Alex
    Nov 29th 2011, 5:33 pm

    What assumptions are required to make the RPI and CPI expectations consistent? Given the different compositions of the two indices, obviously there is a set of price changes such as would deliver RPI=3.5% and CPI=2.0%. Are they implying a renewed housing bubble? One of the biggest differences between RPI (not RPI-X) and CPI is that the first includes more house than the second.

  2. Gareth
    Nov 29th 2011, 10:07 pm

    The Monetary Policy Committee has a responsibility to get inflation down to that level and saying that it would be higher would be tantamount to saying that the BoE policies on quantative easing and interest rates are unjustified. This would throw the government’s economic strategy up in the air and the other assumptions on which the OBR’s forecasts are based.

    What. The. Heck.

    Do you even understand what you just wrote? Seriously?

    If QE (it is better to abbreviate if you cannot spell quantitative) and low interest rates are unjustified… yes. That what be a problem. It means demand in the economy is growing too fast and that there is no supply capacity to meet it, despite 8%+ unemployment.

    It means the calls of “too far, too fast” would have been disastrously wrong; the correct call would have been “not far enough, and too slow” with respect to fiscal tightening.

  3. Richard Exell

    Richard Exell
    Nov 30th 2011, 8:31 am

    Dear Gareth,

    Thanks for your comment. Yes, we are aware that the OBR’s implied criticism is of BoE policies we support.

    Thank you for pointing out the spelling mistake, this is now corrected.