Sunday, 22 April 2012
A two percent inflation rate by the end of the year? All things are possible...
The Bank of England produced this intriguing chart in their most recent inflation report.
The chart illustrates their current assessment of the likelihood that the Bank will meet its two percent inflation target (the dark purple line).
Since the current rate is well above the target, it is a near certainty that it will miss the target in the near term. Hence, the probability is close to 100 percent.
Looking forward, the bank think inflation will fall sharply, such that by the end of the year the Bank thinks that there is 50 percent chance that the target will be met.
The chart also shows the Bank's assessment from November last year. Notice that the bank was more confident of a sharp decline of inflation back at the end of last year than it is now. The light purple line, representing the November expectation, is below the dark purple line, representing the current expectation.
The most recent inflation number rose "unexpectedly". It was yet another "unsurprising" inflation surprise. This is consistent with the grim reality that the Bank has misjudged the post-crisis potency of inflation.
Will the Bank make the 2 percent target by the end of the year? All things are possible, but when our central bank has produced almost a third of a trillion quids worth of new money, you got to wonder about a 50-50 chance.