The Bank of England’s latest set of forecasts are out, and they’re revising their projects for both inflation and real output downward.
Central bank forecasts are, as I’ve said before, a bit of an odd duck. If you ask the Bank of England to provide a forecast about the economic outlook for Japan, then that’s an exercise in analysis. But when the Bank of England makes a “forecast” about the U.K. (or when the Bank of Japan makes a forecast about Japan) then it’s really a kind of policy statement. The Bank is saying here that negative shocks emanating from the eurozone are going to hurt the British economy. But the Bank is also saying that this shock will be processed as a reduction in overall aggregate demand (hence the lower inflation) rather than the Bank acting to stabilize demand and experience the shock as a one-off surge in the price level. That, however, is not a prediction—it’s a policy statement. The U.K. can’t help but be victimized somewhat by events on the continent, but decisions have to be made about how to allocate those losses. A choice is being made here to shunt the losses onto the unemployed and marginal workers, and then the nature of the choice is being covered up by calling it a forecast.