Q4-2022 CPI Inflation Forecasts

A weekly series of quick random charts made in Python 🐍

The chart of the week is a fanchart showing the latest Bank of England (BoE) CPI inflation forecasts. Data comes from the Monetary Policy Report – November 2022 published by the BoE.

The chart shows the forecasted distributions as a coloured “fan” or “envelope” formed by bands corresponding to probabilities. We used the following probabilities: 0.05, 0.20, 0.35, 0.65,0.80, and 0.95 to construct the fan. The central band, which contains the median of the distribution, has the darkest color. The color of the bands becomes lighter as thy get farther from the center of the distribution. We have a total of five bands covering a 90% probability. The fanchart allows us to see where inflation would likely (with a 90% probability) be in the next 13 quarters according to the BoE forecast.

Inflation figures for September 2022 are around 10%, which is well-above the 2% target. The forecast for next quarter shows inflation still increasing. However, the BoE expects inflation to start coming down after that. Moreover, the bank is optimistically expecting a rapid sharp decrease of inflation from the middle of 2023 and up to the second quarter in 2024 (when it expects to be reach its 2% target again).

How the forecast changed?

The latest forecast shows an expected peak of around 11%. Interestingly, this is lower than the expected peak in the previous –August 2022– Monetary Policy report, where inflation was expected to reach levels of around 13% by January 2023, and then slowly come down. See fanchart below with the previous forecasts.

Similarly, the updated forecast shows inflation reaching levels of around 12% as a plausible worse scenario by the second quarter of next year. This is also lower than the 13% forecasted in the previous report.

This more “optimistic” forecast is probably the result of

  • the change in the interest rates context. The BoE base interest rate is currently at 3% (and further increases, to help inflation to come down, are likely) compared with 1.75% in August.
  • taking into account the potential impact of the government support measures introduced to help households and business with their energy bills over the next six months (Treasury-led review has been launched to inform how support for households could continue beyond March 2023).

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

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