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Box A: UK Inflation: The energy price surprise

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  • Francis Breedon

Abstract

The 2020's have not been kind to Bank of England inflation forecasters; their six month ahead absolute forecast errors have tripled from their 21st century average of about 0.5 percentage points to 1.5 percentage points. The key reason behind this deterioration is energy price volatility – something that has always been a challenge to forecasters. However, although the initial move in wholesale energy prices is often hard to predict, the feed through to consumer prices should, in principle, be fairly predictable – even more so in the 2020's where Ofgem's energy price cap has created a long and predictable lag between wholesale gas prices and consumer energy costs. Despite this, the Bank has done a poor job of modelling that feedthrough, with errors in feedthrough explaining about one third of its inflation forecasting errors since 2005.

Suggested Citation

  • Francis Breedon, 2025. "Box A: UK Inflation: The energy price surprise," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 18, pages 9-11.
  • Handle: RePEc:nsr:niesra:i:18y:2025p:9-11
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    File URL: https://niesr.ac.uk/publications/uk-outlook-spring-domestic-issues-stifle-growth?type=uk-economic-outlook
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