A Year of CPI Inflation Forecasts

A weekly series of quick random charts made in Python 🐍

The chart of the week is made of a series of 4 graphs showing the Bank of England CPI inflation forecasts over the past year together with the actual observed inflation. Data comes from the Monetary Policy Reports published by the BoE.

So, let’s start with the forecast from August 2021. The COVID-19 pandemic crisis was starting to settle down, lockdowns and restrictions were lifted in several places of the world, and the thought of war in Europe was in nobody’s mind. The Bank of England main interest rate was at 0.1%. Inflation was just above the 2% bank’s target and there were expectations of an increase coming. This, mainly due to the reopening of the economy causing higher demand for goods and services. ⬇️

By November 2021, inflation was increasing at a faster pace than the BoE central projections but still within the previous quarter forecast range. The new forecast was a bit more pessimistic showing central projections increasing to around 5% –but also showing inflation of around 7% as a tail event. ⬇️

At the beginning of February 2022, it was clear that inflation was raising much faster than the BoE had previously projected. Once again, we can see that the updated forecast is more pessimistic than the previous one. This time, inflation is expected to peak at around 7% in the spring and then fall back to the target 2% level. At this point the Bank of England decided to increase its main interest rate to 0.5% ⬇️

By May, the landscape had changed dramatically with the news of the conflict in Ukraine and the expectation of future pressures on the gas supply from Russian to Europe. The BoE had increased its main interest rate to 1% by this point. The new forecasts show inflation is expected to rise further to levels of around 10%. Moreover, the forecasts show 12% or higher inflation as a likely scenario for the end of 2022; and the the date for inflation to be close to the 2% target has been pushed to 2024. ⬇️

Finally, the latest forecast –August 2022– show an even more pessimistic picture. Inflation is expected to reach levels of around 13% in January 2023 and then slowly come down. Note that the updated forecast show even higher inflation (as high as 15%) as a plausible scenario. The BoE interest rate is currently at 1.75% and further increases, to help inflation to come down, are likely. ⬇️

All the plots in this post were produced using matplotlib and my Python libraries:

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