University of Warwick

• Had it done so, it could have reacted more quickly and prevented inflation from rising as high as 11% in autumn 2022.
• I’ve been doing my own analysis of the BoE’s record by comparing how it has performed relative to other forecasting models.

Different forecasting models

• The bank is not completely transparent about how it forecasts inflation, drawing on a number of in-house mathematical models.
• It also incorporates oil prices and global geopolitical risk, which tends to be be ignored by forecasting models.
• I’ve also calculated a median showing the combined predictions of the models, since this often improves results.
• Looking at the bank’s short-term forecasting is important since this relates closely to its medium-term forecasts.

How they compare

• Inflation model accuracy Over the entire 15-year period, the BoE forecasts actually top the table.
• The median is only marginally behind in second place, followed by model 2.
• Yet when you focus on the past two years, the period that really matters because inflation has been so high, a different picture emerges.
• Now, first place goes to model 3, whereas the BoE predictions fall to third place.

Thoughts for the future

• The latest inflation data, published on September 20, point to 6.8% inflation in the third quarter of 2023.
• Be that as it may, the key point is that to predict inflation accurately, it is important to forecast from different models and to combine forecasts.
• Relying on a single forecast can often mislead and does no favours to the economics profession.
• The BoE could pioneer being open about its inflation model and holding a “prediction tournament” in which the model’s effectiveness would be measured against rivals.