The Bank of England is out with its latest Inflation Report, and it says the economy’s a mess, things are worse than they seemed a few months ago, and that inflation may fall below the target.
Here’s the intro to the report, which you can download here.
Global demand growth has slowed, with activity in the euro area being especially weak. In the United Kingdom, output has been broadly flat over the past two years. Although output is estimated to have fallen for three consecutive quarters, the scale of that contraction was amplified by a number of erratic factors and so probably exaggerates the weakness of underlying activity. Even so, underlying demand growth is likely to remain muted in the near term. But a gentle pickup in the growth of households’ real incomes, combined with the stimulus from the asset purchase programme and the Funding for Lending Scheme should spur a modest recovery. The impact of the euro-area debt crisis, together with the fiscal consolidation and tight credit conditions at home, is likely to continue to weigh on demand.
CPI inflation fell further, standing at 2.4% in June. The near-term outlook is lower than three months ago, reflecting falls in energy prices and some broader-based weakness in price pressures. Under the assumptions that Bank Rate follows a path implied by market interest rates and the size of the asset purchase programme remains at £375 billion, inflation is a little more likely to be below than above the 2% target for much of the second half of the forecast period, as the impact of external price pressures wanes and domestic cost pressures ease. The risks to inflation around the target are judged to be broadly balanced by the end of the forecast period.