To predict inflation the MPC looks at statistics such as
- Present inflation data
- Commodity prices especially oil
- Manufacturing output prices
- Nominal wages increase
- House Prices
- Levels of Mortgage borrowing
- Number of Home repossessions
- Stock Markets
- Consumer spending and consumer confidence, the level of consumer borrowing is also important
- Exchange Rates
- Import Prices (20% of RPIX is generated by import prices
- Inflation expectations
- % of firms working at full capacity, this is difficult to precisely predict and is usually done by surveys
- Money Supply e.g. M0 M4
- Economic Growth and compared to the Long run trend growth rate.
- The MPC may also look at key issues such as the Asian debt restructuring crisis.
- These variables may vary in importance e.g. at the moment 2002 the housing market is a key factor in keeping interest rates high.
- Often variables will give conflicting information e.g. the house prices increased 24% in 2002, but Manufacturing sector was in a recession
- With this data the MPC generate models of the most likely path of CPI inflation over the next 2 years. These projections are produced in the form of fan charts The inflation rate can never be accurately be predicted but probabilities can be introduced
- If the committee believes CPI will increase above the target due to long term factors (tax increase would only affect inflation in the short term) Then they will increase interest rates
- The MPC meets every month to decide on the interest rate
- Monetary Policy at Bank of England