Sunday, February 19, 2023
Forecasters are floored by inflation yet again
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

The table accompanying this piece is on

One of the most famous quotes about forecasting, or prediction, is that it is difficult, especially when it is about the future. So famous is it, in fact, that it is attributed to at least three masters of the quotable quote, Yogi Berra, the American baseball legend, Niels Bohr, the Danish Nobel prizewinning physicist and, of course, Mark Twain. In fact, if you are ever taking part in a quiz, Mark Twain is a good answer to give to any question involving quotes. It doesn’t work for “to be or not to be”, but it works for most others.

I mention it because economic forecasters have found the past three years difficult, and last year was no exception. At the start of 2022, economists did pretty well in predicting that it would be a good year for calendar year UK economic growth. It was clear that comparisons with the previous year, and particularly the lockdown-affected first quarter of 2021, would guarantee that the level of gross domestic product last year would be significantly higher than in the previous year.

If there was a fault in the growth forecasts just over 12 months ago, it was that many of them were a bit too strong. But most were in the right ballpark, and not too far away from the 4 per cent figure reported by the official statisticians nine days ago. Had my annual forecasting exercise, which I have been running for at least 25 years, stopped at growth, it would have been a good year.

Unfortunately it did not but, before going into that, let me say something about the forecasting league table. The source for the 2022 forecasts is the Treasury’s monthly compilation of independent forecasts, in this case for the forecasts were made in December or January.

Some were not, and I have removed one or two which had stayed in the comparison even though their forecasts were made a long time before, in some case 6-9 months before. The exercise is a little unfair on the Office for Budget Responsibility (OBR), because its twice a year forecasts are tied to budgets or other fiscal events. Its 2022 forecasts in this case dated from the previous October.

This is also an issue for the big international forecasters like the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD), which also suffer from not predicting all the economic variables in my comparison.

The Treasury compilation covers more than 30 organisations. It is not comprehensive, but it is the best that we have. Forecasters choose whether to submit their predictions. The absence of the independent Bank of England from this compilation of independent forecasts is a longstanding curiosity.

Now for the nub of the forecasters’ problem. Just over a year ago, in reflecting on the record for 2021, the headline on the equivalent piece to this was “Why economic forecasters missed the surge in inflation”. Well, to quote not Mark Twain, but another quotable American, Britney Spears, ‘Oops, they did it again.’

For economists, particularly City economists, forecasting inflation and interest rates is more important than predicting growth, but on this the failure was spectacular. In January 2022, the highest forecast for consumer price inflation in the final quarter of last year was 5.1 per cent. The actual figure was more than double that, 10.8 per cent.

The highest forecast for official interest rates, Bank Rate, was 1.25 per cent. The rate is now 4 per cent, having risen from 3.5 per cent at the end of last year, though the average for the fourth quarter was 2.8 per cent.

The miss on inflation was mainly due to the fact that these forecasts were compiled ahead of the Russian invasion of Ukraine. Before it, the expectation was of an inflation peak of 6 or 7 per cent in the spring of last year, followed by a fall in the second half. After it, it became clear that inflation would go higher and stay high, and forecasters quickly adjusted their predictions.

Economists did not, also, fully allow for the extent of the Bank’s monetary relaxation. Quantitative easing (QE) continued until the end of 2021, even as inflation was rising strongly.

As for interest rates, all that forecasters had to go on at the start of last year was the Bank’s cautious and reluctant rate rise from 0.1 to 0.25 per cent in December 2021. There was little hint then that we would see the most aggressive rise in rates in the independence era, with a turbocharged series of hikes, some by more in a single step than the Bank had done in 25 years.

You will notice that, in view of the misses on inflation and interest rates, I have had to be generous in my marking this year. But that should not stop congratulations going to Capital Economics, the winners, and not for the first time. Plaudits also to Beacon Economic Forecasting, run by my namesake David Smith, and to the British Chambers of Commerce, as well as to the others near the top of my table.

Despite a generous marking scheme, some forecasters were unfortunate enough to be awarded the dreaded “nul points”. They will be hoping for a better result in 2023.

The rest of us will be hoping that forecasters have learned the lessons of the past couple of years. It is an article of faith – and a target for Rishi Sunak’s government – that inflation will fall sharply this year. Surely it cannot be third time unlucky? I don’t want to have to wheel out that headline again in a year’s time.