The real story about inflation? That 3pc is a blip, and the rate will soon fall

Oh dear. About this time last year, as part of its series of predications about how the sky would fall in after the Brexit vote, the NIESR predicted that inflation would hit 4 per cent. This was way out of line with the the consensus, higher than other economist was forecasting. But in the rather febrile atmosphere its nonsense forecast was given plenty of coverage – including a page lead in (yes, you guessed it) the Financial Times. It turns out that inflation has peaked at 3 per cent, and is widely expected to fall.

Since the NIESR has been congratulating itself recently on the accuracy of its forecasts, it’s worth reminding ourselves what it has to say about inflation.

‘We expect CPI inflation to accelerate rapidly,’ said the NIESR, ‘reaching about 4 per cent in late 2017 and only returning to the Bank of England’s 2 per cent target in 2020.’ In fact, it will struggle to break 3 per cent. If it hits 3.1 per cent then the Bank of England governor will have to write a letter to the Chancellor explaining why. But it won’t be a very tough letter to write: in a note yesterday, Alan Clark of Scotiabank prepared a draft:-

‘Why is inflation so high? The weakness of the pound in the aftermath of the Brexit Referendum. What are we doing about it? Likely to hike rates in the coming months. The horizon over which the Bank expects inflation to revert to target? 2-3 years – and inflation will only be above 3% briefly.’

And how briefly? Here’s the Bank of England’s expectation…

Let’s go back to the NIESR, because the rot it has written about Brexit has not been given quite the attention it deserves. The woes from the Brexit vote, it said, would be reflected in unemployment:

‘The slowdown in activity coupled with uncertainty could lead to a delay in firms’ hiring plans which we expect to be only partially offset by weak real wage growth. We project unemployment to peak at 5.6 per cent in 2017.’

Again, the reality has been rather different. Rather than ‘peak’ anywhere, unemployment has been falling the whole time and is exploring lows not seen since the mid-1970s.

Needless to say, the 500,000 job losses predicted by HM Treasury haven’t happened: instead, there have been about 250,000 more jobs created. Wage growth is sluggish, yes, but otherwise the Brexit economic disaster has (embarrassingly for the FT) failed to materialise. It seems that inflation peaking at 3 per cent, from a long-overdue currency correction, was the worst to expect from the Brexit vote. Project Fear fails to materialise again.