Bank of England Sees Low Inflation Through 2010

The Bank of England (BOE) released it's quarterly report on inflation expectations today, which stated that the Bank expects inflation to remain in the 1-2% range over the coming two and a half years. What the headlines about this release didn't reveal is that, according to the inflation probability model provided by the BOE (Chart 5.4), the year 2010 will be characterized entirely be year over year percentage decreases in inflation. In fact, the Bank of England's models are forecasting some probability of the country experiencing negative inflation towards the end of 2010. Obviously, there is a difference between disinflation and outright deflation; however the notoriously flexible central bank models are grazing dangerously close to the deflationary realm.

From a macro standpoint, the report below tells us one very important thing: the Bank of England is expecting the next 18 months to be characterized by very slow, very weak growth. Any other assumption, when factored into an inflation probability model, would exert at least some upward pressure on the price of goods and services across the UK. As I've already pointed out, the BOE is expecting an entirely dis-inflationary 2010. For now, I remain firmly in the camp that perceives deflation to be the far greater threat than inflation.

BOE Q2 Inflation Prospects Sphere: Related Content