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 55.

    Maybe people are already aware of this subtlety.

    The headline is that inflation has fallen, not so!
    .
    Inflation is still, in reality, rising, that is our money is STILL losing value only now at a slower rate.

    To say that "inflation" has fallen isn't strictly true, it is only the rate of the rate of inflation that has reduced.


    .

  • rate this
    0

    Comment number 54.

    re#52
    Agreed.

    Prescription, Dr Bob?

  • rate this
    0

    Comment number 53.

    So HSBC is not front page news or worthy of this blog. Strange considering their the largest UK Bank and have been found guilty of among other things money laundering. Why am I not surprised that it was the US whom acted. I understand on Wall Street, some bank executives are getting nervous, Barclays? Goldman Sachs, JP Morgan, CitiBank, to quote call me Dave "We are all in it together"

  • rate this
    +1

    Comment number 52.

    Dream on. The pound has effectively been devalued by 7% minimum since 2010, to say that inflation is going in the right direction is meaningless. We are about to experience the worst of both worlds over the next 12 to 18 months unless the government changes direction. Stagflation beckons, pumping fiat money into the economy does nothing for the economy but allows the banks to recover their losses.

  • rate this
    +1

    Comment number 51.

    Forget the LIBORgate, how about the BOE gate?

    They have ignored their basic remit for 5 years and still inflation is too high and above the limit!

    They should be charged and all the members of the MPC committee should be brought to justice.

    They cant provide us growth but only stagflation and more QE and more 3rd world economic measures..

  • rate this
    +2

    Comment number 50.

    As its true that the inflation rate is actually a pay cut rate indisguise.

    Can i point out I do not have to buy a 42" lcd tv every week or scuba gear for that matter I would say that the day to day ordinary living rate of inflation is nearer 10% especially with food and fuel.

    Why not strip out incidental items like the afore mentioned TV & give us the TRUE rate of pay cutting inflation!

  • rate this
    +1

    Comment number 49.

    It's Rally Round the Flag Chaps one of our cabal is under attack: Hikes interest rates,says no crash is coming, sees insurance against the downside and toxic debt off loads build. Fortunes made & lost for insiders & the rest (resp). Dishonesty wrecks the BoE's Libor-based calls.The rewards of post retirement books & US lecture tours beckon.But Oxbridge chums get inflation right. Pip, pip, Steph

  • rate this
    +1

    Comment number 48.

    Mankind scuppered by leaves, snow, wind and rain.
    Would you credit it.

  • rate this
    0

    Comment number 47.

    re#44/40 feedbackloop,
    Beeb have had s/ware & w/site probs.

    Perhaps in sorting them out, they've plugged the cracks that allowed writings to break rules a squeeze thru tiny gaps!

  • rate this
    +2

    Comment number 46.

    41

    Fear? Not really: more annoyance.

    As you say it will arrive either fast or slow: we know not. I do know it will come right out of the blue: SURPRISE!

  • rate this
    +1

    Comment number 45.

    Come on Stef - the future of the City, a major part of the UK economy hangs in the balance and you provide a blog on inflation.

    I refuse to believe a journalist of your abilities can seriously believe this is the most important issue to comment on today.

    Please let your readers know what directions or "guidance" the BBC bosses have provided regarding the content of your blog.

  • rate this
    0

    Comment number 44.

    40 WOTW - what happened ?

    wall compulsory purchased for HS2 ?

    tape loop broke or

    moderated or

    got bored with lesser intellects or

    other ?

    39 KH BTW how bout including asset inflation in your world view. QE keeps assets pumped up and to that extent its inflationary - but without it they would otherwise fall.

  • rate this
    0

    Comment number 43.

    @37
    Thats a worry but I hope that GO has got a real taste for this low inflation thing. Remember, it affects his Benefits bill from Sep/Oct on. Plus, lower transport costs should start to filter thru' supply chain from now on.

    He could of course keep inflation going down by switching his taxes around! ;-)

  • rate this
    +2

    Comment number 42.

    Maybe the BoE should target cumulative inflation, too.

    Past price rises may fall out of inflation statistics, by definition, but lost spending power is not so easily recovered.

  • rate this
    +2

    Comment number 41.

    34 SL - fear not ? The major adjustment required can come either fast - or slow as at present. If its the latter commentators all get excited about small changes in a fairly static situation and the idiot politicians argue about it trying to fool the voters. Huge money via QE is being deployed to keep the bubble inflated and its going to take time for it to deflate. Meantime it can still burst.

  • rate this
    +2

    Comment number 40.

    Whatever happened to WrtingsOnTheWall?

  • rate this
    -1

    Comment number 39.

    24 david
    its no good arguing with people that qe is not inflationary
    their ideological blinkers do not compute
    you can point to facts like japans years of qe and large defecits and very low inflation
    or that mometarists govts of reagan and thatcher abandoned
    money supply targets as unworkable
    but supply siders are not put off by reality

  • rate this
    +1

    Comment number 38.

    So the warning is that although inflation has fallen in the last month, expect it to be higher over the coming months with the rise in oil and food prices. So much for the ITEM analysis that we should have some recovery due to the fall in oil prices, however if the pound continues to strengthen then this may offset this somewhat.

  • rate this
    +2

    Comment number 37.

    Dont worry chaps. Temporary downwards blip. Brent crude has risen 13$ in the last ten days. Be ready for the petrol price hikes at a supermarket near you. The BOE has no right to apparently being right for once. They were so bad the first time around, they noticed nothing at all. Shame on the lot of them. Pensioner inflation is running at 8%, coupled with no interest on your savings. Doom is here!

  • rate this
    0

    Comment number 36.

    re#16
    Oi! Did I not predict lower inflation because of decline in fuel price? Go to the back of the class.

    The ONS numbers should be rock solid although mistakes are not impossible. Problem in part lies in presentation to/understanding by media eg. ONS spokes on R4's WATO re population nos. yesterday!

 

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