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..

 

Comments 5 of 55

 

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