How Bank of England Predicts Inflation

To predict inflation the MPC looks at statistics such as

  1. Present inflation data
  2. Commodity prices especially oil
  3. Manufacturing output prices
  4. Nominal wages increase
  5. House Prices
  6. Levels of Mortgage borrowing
  7. Number of Home repossessions
  8. Stock Markets
  9. Consumer spending and consumer confidence, the level of consumer borrowing is also important
  10. Exchange Rates
  11. Import Prices (20% of RPIX is generated by import prices
  12. Inflation expectations
  13. % of firms working at full capacity, this is difficult to precisely predict and is usually done by surveys
  14. Money Supply e.g. M0 M4
  15. Economic Growth and compared to the Long run trend growth rate.
  16. 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

 

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