Wet weather helps Bank's inflation forecast

 

The Bank of England may now be in the spotlight for its handling of the Libor scandal, but its inflation forecast is looking better than it has for a long time. It may partly have the weather to thank.

Today the Office for National Statistics surprised everyone by revealing that the headline rate of inflation for June had fallen to 2.4%, down from 2.8% in May. Put it another way, Britain's inflation rate has halved since last September - to its lowest rate since the end of 2009.

Funnily enough, that is almost exactly what the Bank said would happen, in its November 2011 Inflation Report forecast - a forecast many did not dare believe, given how often - and how wildly - the Bank's recent forecasts have turned out to be wrong.

We can't expect inflation to continue to fall quite this fast. There were quite a lot of special factors at work in the June figure, including the miserable weather, which seems to have helped to push down clothing prices by forcing shops to start their summer sales early.

Bank of England inflation projection from its November 2011 Inflation Report

Clothing and footwear prices fell 4.2% in a single month, the biggest June decline on record. There was also a sharp fall in the price of meat. If that is partly due to a lot of cancelled barbecues it could well be temporary (let's hope so).

Then again, as the Bank of England has reminded us, it has often been "special factors" pushing inflation up in the past few years - particularly, big changes in the price of oil and other commodities. This month's fall in inflation also reflects the sharp drop in the price of oil since the start of the year, which has meant falling petrol and diesel prices at the pump. City economists are also reassured by the fall in the "core" inflation rate in June, from 2.2% to 2.1%.

There is little sign here of home-grown inflationary pressures building up - quite the opposite. You would not normally expect to see upward pressure on wages or other domestic input prices in such a flat economy, but these have not been normal times.

So, today's figures will be considered good news at the Bank of England, even if it does reflect the rather bad news we have been getting about the state of the recovery. But the monetary policy committee know that rising commodity prices could yet come to bite us in the next few months.

As Chris Williamson, at Markit, points out, Brent crude oil is now back to $104 a barrel - up from $89 in mid-May - a jump of 17%.

You might also have seen the recent panic over the severe drought in the US and its effect on the price of corn, wheat and other key commodities. Corn and wheat prices have both risen by about 45% in the past month alone. America hasn't had enough rain. We have had far too much. But neither is good news for the crops - or, possibly, our future inflation rate.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 35.

    Steffie,
    Why is it a surprise?

    Since record fuel prices in April, price for diesel&petrol has fallen by approx 20p. That's -14% in 2 months; annualized, that would have petrol at approx 23p p/ltr in Apr 2013! (Oh, I wish!)

    Food in my basket is unchanged/slightly up & clothes prices were unchanged for stuff I buy.

    Is it that people do not wish to know how stupid they have been for 40 yrs?

  • rate this
    +1

    Comment number 34.

    32

    Fear not it is coming.

    I know the establishment view is to believe in faeries and the gold of the Leprechaun King but the slump is out there waiting for the fat lady to sing.

  • rate this
    +1

    Comment number 33.

    The only thing that's inflated is their egos!

  • rate this
    +1

    Comment number 32.

    An unforcasted short term small fluctuation in an imperfect measure that didnt help identify the asset price inflation that caused the crash. What on earth is this article about ? Its like discussing the trajectory of fire embers going up a chimney or leaves swirling down the drain. Pointless. BTW Stanilic not a slump that would have asset price adjustment leading to recovery. This is a drift.

  • rate this
    -1

    Comment number 31.

    @30 "..A halving of inflation still means that prices are still rising yet further whilst for many incomes have not risen for years"

    I agree that inflation is still well ahead of hard pressed family income increases but this continued reduction in inflation is still very welcome good news.

    I'm not one for spinning negative news to positive, this is straight forwardly good.

  • rate this
    +1

    Comment number 30.

    After high inflation for years, (and continuously higher than predicted) inflation was likely to fall at some point as the figures work through the annual data. Well done to the BOE for getting it right!

    A halving of inflation still means that prices are still rising yet further whilst for many incomes have not risen for years

  • rate this
    +2

    Comment number 29.

    Even the B of E has to get a prediction right on the law of averages. Shame we have had to wait so long!

  • rate this
    +2

    Comment number 28.

    The BOE is a busted flush. They have failed this country for years.

  • rate this
    0

    Comment number 27.

    Goodness me Steph, you are a misery.
    You make good news sound like a death toll.

    My wife, even now, is hiding all the ties and chairs should I decide to take the "Short drop".

    Come on, turn one up at the edges - give us a smile chuck!

  • rate this
    +7

    Comment number 26.

    Many times each year someone guesses the lottery numbers correctly, but millions more do not.
    In guessing games there will always be the lucky correct answer.
    The REAL GAME is the economy ... and in that respect the Tories and the BoE have no reason to gloat ... far from it as their QE policy is stoking up MASSIVE future problems (for the ordinary folks!)

  • rate this
    +5

    Comment number 25.

    Excuse me but many retailers are busy reducing the size or weight of their products but keeping the price the same!! surely this masks the true rate of inflation by quite some way?

  • rate this
    -1

    Comment number 24.

    @4.Argent Pur
    ..QE will continue to push it up too.

    We had a big chunk of QE in june & the figure fell, if QE caused inflation then they wouldn't have been able to hide it inflation would have risen significantly.
    As I pointed out numerous times, QE is not inflationary, unfortunately it doesn't make banks lend more either so is completely useless (for that purpose) but it's not inflationary

  • rate this
    +2

    Comment number 23.

    Eventually a forecast out of a number of forecasts has to match what happens, it still does not mean the forecasting is accurate, it could be happy coincidence

  • rate this
    +2

    Comment number 22.

    I think optimism is not called for here. With all the printing of money and large firms hoarding vast swathes of cash because of the lack of investment oportunities there will be a time when everyone will have had enough of seeing their cash shrink with derisory interest rates. All this money is like a dam with cracks and holes in it: behind it a huge wall of liquidity just waiting to speculate.

  • rate this
    +10

    Comment number 21.

    You seem to be missing out the 2 most recent Bank of England Inflation Reports Stephanie. The latest May 2012 told us this.

    "The higher near-term inflation outlook also reflects other pipeline pricing pressures...In the near term, inflation is likely to remain well above the target"

    Yes they changed their mind just as the rate of inflation fell back. Wrong yet again!

    http://bit.ly/Q21BlB

  • rate this
    +2

    Comment number 20.

    The single biggest factor in declining inflation is the reduction in import prices caused by the collapse in the value of the Euro. It now stands at €1.272 to £1, up from €1.14 a year ago. Sadly, we are not doing quite so well with the Dollar, so oil import prices remain high.

  • rate this
    +4

    Comment number 19.

    16.Acet

    I couldnt agree more.

    There is no mention in the article of how the last changes to the way inflation is calculated have affected the figures.

    There is no credibility left in any figures coming out of the financial sector, these figures had to come down to justify more QE go figure why they have come down.

  • rate this
    0

    Comment number 18.

    Every little helps...

  • rate this
    +6

    Comment number 17.

    Oh Woopey do...the inflation rate as fallen to 2.4% small comfort to the large number of woekers who haven't had a pay award since 2008 have had tax credits wiped out and services cut oh and are unlikely to see a pay award in 2013 either...so whilst Multi millionaires Osborne Cameron and Clegg can crow about the fall in inflation it is still a drop in living standards for the majority

  • rate this
    +4

    Comment number 16.

    Can we still trust these figures?

    The revelations of the LIBOR scandal indicate that the official establishment colluded in having a critical measure of the price of money being an "improved" version of reality, so why not the inflation figures which when lower boost the GDP numbers via the GDP-deflator?

    How do we know that any politically important offical figures in the UK are not "improved"?

 

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