A different take on Inflation!

It seems economists, the Government, and the Bank of England, amongst others, are somewhat interested in the inflation figure for February (figures due to be released Wednesday 20 March). It’s viewed as a critical figure as it is likely to influence the interest rate the Bank will set – which in turn affects many people’s mortgages.

The problem is that these eminent bodies continue to make the mistake of comparing one spot result against another. “It was 4.0% in December, and we forecast a slight rise to 4.1% in January”, was the consensus. What they fail to realise is that the reality is each of these individual results was / will be an accident.

It’s a highly VUCA (Volatile, Uncertain, Complex and Ambiguous) world, and that is especially true for the economy. Therefore a more useful way to look at and respond to inflation would be to use a proven statistical technique to assist in better understanding and thus predicting inflation figures.

We’ve applied our advanced SPC-technique to the monthly UK inflation figures back to January 1989, as shown in the chart below.

The actual results so far are plotted in blue (there are some red and green results in the past where there were sudden, unpredictable changes), the upper and lower red lines are guidelines to a likely performance corridor, and the green line is the likely average over time. You can see that there are discontinuities in the performance corridor, the last one being around the beginning of 2023, where sudden changes in the results bring in a new performance regime. Up to the end of 2022, you can see inflation was on the rise – since then it’s on the decline.

By projecting the performance corridor forwards, the chart above is suggesting that February 2024’s result is likely to be around 3.6%+1.7%. Or to put it another way, it’s most likely to be around 3.6%, and is less and less likely to be a result as you get closer and closer to the upper (1.7% above the average line) or lower (1.7% below the average line) red guideline. And it’s highly unlikely to be a result outside the performance corridor (red or green x) – unless something unusual happens.

So roll on 20 March – not quite the Ides of March, but still close enough for something unusual to happen!