BOE admits inflation forecasting errors

Bank of England Acknowledges Inflation Forecasting Errors in the UK

The Bank of England has admitted to making mistakes in its predictions of inflation in the United Kingdom (U.K.) and expressed the need to learn valuable lessons in determining monetary policy.

During a Treasury Committee meeting, policymakers faced criticism for failing to anticipate a sustained increase in inflation, primarily driven by higher-than-anticipated food prices.

Conservative MP John Baron accused the bank of a “woeful neglect of duty” in not bringing inflation closer to its 2% target, which he argued was causing significant hardship for households and businesses.

Huw Pill, the bank’s chief economist, acknowledged that their economic forecasting models had led to inaccuracies. He stated, “We recognize that our inflation forecasts have been too low. We are currently investigating the reasons for these errors, analyzing the associated behaviors, and assessing their potential continuation.”

Earlier this month, the Bank revised its inflation expectations after acknowledging that food price inflation had proven more persistent than expected. Initially, the UK’s consumer price index inflation was projected to decrease to as low as 1% by mid-next year, but it is now estimated to reach approximately 3.4%.

Bank Governor Andrew Bailey responded to criticism regarding the bank’s economic modeling and interest rate decisions, stating that there were significant lessons to be learned in conducting monetary policy in the face of unprecedented shocks. However, he emphasized the necessity of making policy decisions in real time without the benefit of hindsight.

Bailey also maintained that inflation had “turned the corner.” This statement was made ahead of official inflation figures expected to reveal a slowdown in the rate of CPI in April, falling below double-digits.

Earlier this month, the bank’s Monetary Policy Committee decided to raise interest rates for the twelfth consecutive time, bringing the level to 4.5%. Bailey attributed the increase in food prices to a “very significant underlying shock” caused by Russia’s invasion of Ukraine in March of the previous year.

He reiterated this perspective on Tuesday, highlighting that extreme weather events also played a role in the bank’s failure to meet its inflation forecasts. Bailey mentioned that food producers had stockpiled more raw materials than usual, resulting in prolonged higher prices, and cited events like issues with vegetable crops in Morocco, rising sugar prices, and avian flu as contributors to unexpectedly elevated food inflation.

“These are genuinely unpredictable factors from one period to another,” he added.