Documenting the BoE’s appalling track record in predicting CPI inflation

Along with today’s near record CPI print of 5%  we also got the release of the letter from Governor King to George Osbourne explaining why yet again the BoE has failed miserably  at hitting its 2% government target.

The letter itself is full of the usual ‘medium term’ nonsense and ‘commodity shock’ excuses. But seeing as we are now entering the 3rd year running where the BoE has with out fail missed its government target we now have a lot of letters to look back at and compare. So we thought it would be worthwhile compiling all the ‘fail’ letters that that BoE has written to see if we should take their newest letter seriously.

You have to go back to November 2009 for the last time the BoE was near its 2% target.

15th February 2010:

The Excuse:

Three such short-run factors have driven the current measured rate of inflation up. First, the restoration of the standard rate of V A T to 17.5% is raising prices relative to a year ago. Second, over the past year, oil prices have risen by around 70%. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation. Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.

Predictions to get back on target:

The MPC’s latest projections, published last week in the February Inflation Report, suggest that, although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.


So back in February 2010 the BoE claimed that one of the ‘temporary’ factors causing the CPI to be above target was the price of oil. The price of oil on that day was $80.

The BoE predicts that the CPI will return to 2% sometime between July-December 2010. Between this period the CPI in reality was higher than in February 2010, averaging 3.22% over those six months at the end of 2010

Price of gold: £700

17th May 2010:

The Excuse:

The MPC’s assessment is that that rise is largely accounted for by three factors: first, the impact of higher oil prices, which on average in April were nearly 80% higher than at the beginning of 2009, pushing up on petrol price inflation; second, the restoration at the beginning of January of the standard rate of VAT to 17.5% and third the continuing effects on inflation of the sharp depreciation of sterling in 2007-8. The MPC judges that together these factors more than account for the deviation of CPI inflation from target and that the temporary effects of these factors are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy.

Interesting to note that the VAT excuse is ‘bumped’ to number 2 and now the excuse ‘de-jour’ is now the rising oil prices.

Predictions to get back on target:

The change in VAT and higher petrol prices will continue to be reflected in the overall price level. But, unless they increase further, that should affect the twelve-month CPI measure of inflation for no more than a year.


Oil is now the biggest contributor to the price rises. The price of oil on the day of the letter was $73 lower than when the previous letter was written. Or to put it another way the price of oil had actually gone down since the last letter was written whilst the excuse of higher oil prices was now ‘bumped’ to the top slot.

The time when the BoE will actually hit target is now pushed back to May 2011 – there is no excuse given as to why the BoE have ditched what they wrote in their previous letter when inflation was meant to be back on target by the second half of 2010.

By May 2011 CPI inflation was 4.5% – over a full percentage point higher than when the BoE wrote the letter.

Price of gold: £847

August 16th 2010:

The Excuse: 

Inflation has been volatile over the past two years or so. In that time, it has moved above 5%, then fallen to 1.1 %, risen again to 3.7%, and has since started to fall back once more. But on average over that period, inflation has been above the target. And the recent strength of inflation has surprised the MPC.

The MPC’s assessment is that much of the current high level of inflation can be attributed to the increase in VAT in January 2010, past rises in oil prices and the continued pass-through of higher import prices following the depreciation of sterling since mid-2007. The MPC’s central judgement remains that these effects will prove to have a temporary impact on inflation, and are masking the downward pressure on inflation from spare capacity within companies and the labour market. But, as explained in our August Inflation Report, it is hard to be precise about the quantitative impact that each of these factors has had on inflation. Small differences in the assumptions about the impact of different factors can lead to noticeably different interpretations of why inflation has behaved in the way that it has.

VAT is back to being the top cause, but a least this time the BoE admit they’ve been ‘surprised’ by the rise in the CPI. But again we’re told that these effects will be temporary.

Predictions to get back on target:

As set out in the August Inflation Report, following the announcement in the Budget of a further increase in VAT, inflation is now expected to remain above the 2% target until the end of 2011 – about a year longer than projected in May. There remains a significant probability that I will need to write further open letters to you in the coming months.


The BoE now pushes out its expectations of a return to the 2% CPI target to “the end of 2011”. Well, here we are at the end of 2011 and the CPI has never been higher, in fact reaching a record high in October of 5.2% – a full 2.1% higher than when the BoE wrote the letter.

Price of gold: £785

November 15th 2010:

The Excuse:

As I described in my August letter, the MPC’s assessment is that the current elevated rate of inflation largely reflects a number of temporary influences, including the restoration of the standard rate of V A T to 17.5% in January, past rises in oil prices and the continued pass through of higher import prices following the depreciation of sterling since mid-2007. But, as discussed in the November Inflation Report, the impact of these factors on inflation is hard to calibrate, and small differences in assumptions can affect the explanation for the strength in inflation.

Is this a tacit admission that the BoE is proven quite hopeless at forecasting inflation?

Predictions to get back on target:

The MPC expects that the prospective increase in the standard rate of VAT in January to 20% will mean that inflation is likely to remain elevated throughout 2011. In addition, commodity and other world export prices have increased recently, adding to companies’ costs and so to inflationary pressure in the near term. As a result, CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so. Indeed, over the next few months the inflation rate might rise further.


The BoE sees the CPI remaining above target for a least another year. A year later inflation is at 5%, higher than when they wrote the letter in November 2010.

Price of gold: £855

February 14th 2011:

The Excuse:

As I have described in previous open letters, three factors can account for the current high level of inflation: the rise in VAT relative to a year ago, the continuing consequences of the fall in sterling in late 2007 and 2008, and recent increases in commodity prices, particularly energy prices. Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2% inflation target.

Or in other words if you take away all the things the BoE have done to cause the CPI rise the BoE would’ve met its 2% target. Genius.

Predictions to get back on target:

Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices. The MPC’s-central

judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead. 


So we’ve gone from CPI getting back to target sometime in July-December 2010 to perhaps not getting back to target until February 2014. What happened to the BoE meeting its target of 2% “at all times” as laid out in the remit letter to the BoE from the Chancellor? And since when did temporary come to mean 4 years?

Price of gold: £850

May 16th 2011:

The Excuse:

As set out in my previous letter, the current high level of inflation reflects three main influences: the increase in the standard rate of VAT in January to 20%, higher energy prices and increases in import prices. Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been substantially lower and probably below the target.

Again with the “if it wasn’t for the inflation there would be no inflation” argument.

Predictions to get back on target:

Continuing volatility in energy and commodity prices makes it difficult to be sure when inflation will return to the target. As explained in the May Inflation Report, inflation is likely to rise further over the next few months, as increases in the price of energy are likely to raise petrol prices and make it more likely that there will be substantial increases in utility bills later in the year. But, under the usual conditioning assumptions that Bank Rate moves in line with market interest rates and the stock of purchased assets financed by the issuance of central bank reserves remains at £200 billion, the MPC expected inflation to fall back through 2012 and into 2013, by which time the chances of inflation being above or below the target were broadly balanced.


Note the BoE is not saying that the CPI will on average have been 2% over the 4 year period that it has been above target. But rather it is saying that at sometime in 2013 the CPI will be back to 2%.

Even if you accept that the BoE has a mandate to meet the 2% over the medium term (it doesn’t – it should be 2% “at all times”) this absolutely is not achieving 2% over the medium term. This point is very important.

The BoE are essentially saying that even if they miss their governmnet mandated target each and every month for 4 years, so long as  at the start of the 5th year with the CPI back to 2% they can claim that they’ve been following their target.

This is basically an admission that the BoE don’t have a target at all and are certainly not following one. As long as at some point far in the future they manage to hit their 2% target they can claim success.

To take this absurd notion to its absurd conclusion let’s suppose that at your work you have a target of answering email correspondence within one day 80% of the time. Each and every month for 4 years and 11 months you not once hit the 80% target and on many occasions you were wildly off target. Then on the 4 year and 12th month you hit the 80% target, you wouldn’t tern to your boss and say “see, i’m doing a wonderful job at hitting my target”. It would be absurd, and to be honest you probably would’ve had that sack long ago for not hitting your target.

Price of gold: £925

August 15th 2011:

The Excuse:

Inflation was above the 2% target throughout 2010 and has risen further this year. The current elevated rate of inflation continues to reflect the temporary impact of the factors described in recent Inflation Reports and my previous letters: the increase in the standard rate of VAT to 20%, and past increases in global energy prices and import prices. Although it is impossible to identify the effects of those factors with precision, it is likely that inflation would be below target in their absence.

Nice to see that the BoE staff know how to use the ctrl+alt+c and ctrl+alt+p combo.

Predictions to get back on target:

Inflation should then fall back through 2012, as those effects dissipate and downward pressure from slack in the labour market persists, although the precise timing and extent of that fall are highly uncertain.

It is clear that during all of 2012 the BoE will not hit their 2% target and they admit as much in the above

Price of gold: £1080

November 15th 2011:

The Excuse:

CPI inflation fell back to 5.0% in October. But it remains well above the 2% target. As described in previous letters and Inflation Reports, the current high level of inflation reflects the increase in the standard rate of VAT earlier this year, and previous steep increases in import and energy prices, including recent domestic utility price rises. In the absence of those temporary factors, it is likely that inflation would have been below the 2% target.

Predictions to get back on target:

As the impetus from external price pressures dissipates, and the increase in VAT drops out of the annual comparison early next year, the Committee’s best collective judgement is that inflation will fall back sharply in the next six months or so, and continue falling thereafter to around target by the end of next year.


After reading all the above failed predictions on hitting the 2% target why should the Chancellor believe a word they say? Remember that inflation was meant to be back at 2% in the second half of 2010 according to the 15th February 2010 letter.

Price of gold: £1100

And again, even if the CPI does fall back to to 2% by the end of 2012 so what? It means that the BoE will have been above target, not just by a little but by a lot, for over 3 years. To claim that you’ve hit target over the medium term doesn’t the UK economy need month after month of below average inflation just mean that on average over that 3 plus year period inflation has been 2%?

This is something we covered in detail here. And it means that for the UK to get back to the 2% average by the end of next year, the UK needs to print NEGATIVE 2% annualised inflation each and every month from now until December 2012 – something which incidentally has never, ever happened in the UK’s economy. So expect more inflation and continued debasement on the UK Pound.


(click for sharper image)

Even if the UK got 0% inflation every month, it would take until nearly 2014 for the BoE to get back to target. If the BoE wanted to return to their government mandated target next month it would take a fall of inflation of over 45% annulaised.

Since the BoE has started writing these letters to the Chancellor gold has risen from £700 to £1100. That is a near 60% increase in 21 months…. And the Governor hasn’t written his last letter yet – not by a long stretch.


Link to this article: : http://www.goldmadesimplenews.com/gold/documenting-the-boe%e2%80%99s-appalling-track-record-in-predicting-cpi-inflation-5690/

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