As usual, the August Inflation Report predicts a recovery in GDP expansion combined with inflation falling to the target and then below in the second year of the forecast horizon, implying scope for further monetary easing. Medium-term growth prospects, however, are deemed materially worse than in the May Report – GDP is expanding by about 2.25% per annum by 2015 versus 2.75% in May, with the downgrade partly due to a further negative reappraisal of productivity performance.

The predicted recovery in GDP growth in 2013 is viewed here as plausible given the pick-up in real money expansion during the first half of 2012 and the further easing measures announced in July – assuming, of course, that a Eurozone meltdown is avoided. The Governor’s self-congratulation about inflation performance and prospects, by contrast, is premature, recalling a similar “mission accomplished” claim in 2009. Much of the first-half decline reflects commodity price weakness that has since reversed, while core pressures – particularly in the services sector – remain stubborn. Barring a global recession or significant sterling strength, CPI inflation should stay above the 2% target and is likely to be rising – not falling – later in 2013 and in 2014 in lagged response to current monetary stimulus.