Bank of England caught in stormy weather over inflation forecasting

A Bayes academic has welcomed evidence from former Federal Reserve Director Dr Ben Bernanke at the Treasury select committee's hearing on inflation forecasting this week.

Dr Bernanke, a Nobel prize-winning economist, published a high-profile review of the Bank of England’s approach to inflation forecasting last month. Some politicians and commentators have criticised the Bank’s decisions in the run-up to the recent inflation crisis.

Giovanni Urga, Professor of Econometrics and Finance at Bayes Business School (formerly Cass), said: “The Bank of England and politicians must pick up crucial recommendations that Ben Bernanke set out in his review and that he explained to MPs this week.

“Nothing will be gained by cherry-picking from his comprehensive package of recommendations."

“It is significant that when invited to criticise the Bank’s forecasting performance, Dr Bernanke noted that ‘the Monetary Policy Committee took decisions without as much support as they would have liked from the econometrics side’. That is a key lesson of the last four years. In this time of high instability, econometric specifications need to be assessed appropriately and more systematically.

Fanning the inflationary flames?

“Dr Bernanke also strongly underlined  his advice that the Bank seek other ways of contributing to the public discussion than the so-called fan charts which do little to inform that discussion. He is right to tell MPs that the fan charts’ wide span of possible inflation outcomes does not educate the general public about the high degree of uncertainty in the economy.

“The Bank also needs research staff who are continuously engaged with the most recent advances in the scientific literature on modelling and forecasting, with the support of more data specialists and PhD researchers.

“Those staff should be incentivised to accumulate experience and expertise so they stay in their role, rather than leaving for higher paid jobs or to further their career. Currently the turnover of these vital analysts is simply too high.

“We need regular reviews of modelling frameworks that need to rigorously forecast inflation expectations and wage-price movements. The Bank needs to identify the different drivers of inflation expectations – taking account of both demand and supply sides components.

“Politicians, economists and the Bank also have a role in educating the public about the limitations of inflation forecasting – particularly when we are living through times of great uncertainty.”

Professor  Urga  is hosting  a  seminar with speakers from the Bank of England and European Central Bank on Inflation, Expectations and the Real Economy - Forecasting on  17 June. You can sign up  to attend  here.