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7 February 2011

Stop worrying about inflation, part two

A graph and a table for anyone who doubts the MPC's overconfidence.

By David Blanchflower

The fan chart below depicts the probability of various outcomes for CPI inflation in the future. This is the famous fan chart.

The MPC’s forecast by quarter — based on market rates and £200bn of quantitative easing — is reported in the first column. The second reports the probability that inflation will be below 1 per cent.

MPC’s inflation forecasts
Year and quarter MPC inflation forecast % Likelihood of inflation being less than 1 %
2010 Q4 3.27
2011 Q1 3.61
2011 Q2 3.47
2011 Q3 3.29
2011 Q4 3.03 6
2012 Q1 2.12 21
2012 Q2 1.97 25
2012 Q3 1.94 27
2012 Q4 1.85 30
2013 Q1 1.83 31
2013 Q2 1.85 31
2013 Q3 1.9 30
2013 Q4 1.96 28

 

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From 2012 Q1, inflation is below the target. There is a significant chance that inflation will be below 1 per cent. But this is all based on a very optimistic growth forecast that may not pan out — and if it doesn’t, inflation will be even lower. There is every likelihood that the MPC’s forecast for growth will be lower in their new inflation report to be published next week.