Uncertainty is only thing Bank is certain about
This week, the Bank of England will present its latest Inflation Report to the world. Now, obviously, I haven't seen the document — the bank is a remarkably unleaky institution — but I've got a pretty shrewd idea what it will say, because Bank officials have been dropping some broad hints about it for a while.
The Governor, Mervyn King, told the Treasury Select Committee a couple of weeks ago that inflation would stay above the official 2% target for “much |of next year”; the Bank's chief economist, Spencer Dale, said before that that the target would be missed for the “whole” of 2011. So, you get the picture.
And Adam Posen, one of the external members of the Bank's Monetary Policy Committee, made a thoughtful speech a few weeks ago.
He said: “The MPC's current forecast is that we are far more likely to have an economy with less than 1.5% inflation or with greater than 2.5% inflation over our target horizon than an outcome close to our target.”
Frank, but hardly reassuring.
So, as everyone at the Bank says, with entire honesty, there's a lot of uncertainty about.
Just think for a moment about the increase in VAT on January 4 next year.
That is pretty much the reason why inflation will stay above the 2% target for longer than the Bank thought before, and such political decisions cannot be foreseen by the Bank, it is fair to allow.
At the Bank's Inflation Report press conference this week, the Governor and his senior colleagues will once again explain why inflation is quite as high as it is, and why their past forecasts were errors.
This time last year they told us it would be about 0.7% now, rather than above 3%.
There will be the familiar litany of one-off causes: the depreciation of sterling by more than 20 per cent since 2007; commodity price inflation, with the wheat spike a very uncomfortable reminder of its resurgence this year; the hike in VAT back to 17.5 per cent last January, and so on.
The problem for us is that in this case Mr King's excuses really are correct.
The bigger picture is that the Bank has been extremely lucky to have got away with inflation being quite so high for quite so long without an even bigger impact on wages and price setting |behaviour, and the beginnings of an inflationary spiral.
The Bank will argue that there is little sign of that even now; but how sure can we be that the Bank is right this time round?