The November Inflation Report suggests that the MPC is badly split and unlikely to be able to muster a majority for action – in either direction – for the foreseeable future. In a now-familiar routine, the Bank has been forced to raise its near-term inflation forecast significantly but continues to project an eventual decline to the 2% target, based on a “neo-Keynesian” model emphasising the “output gap” and fiscal tightening. The alternative “monetarist” view that persistent inflation overshoots reflect an excess of the supply of money over the demand to hold it – with demand depressed by the Bank’s imposition of negative real interest rates – is ignored.

Observations:

• The MPC's bias is summarised by its mean forecast for inflation in two years' time based on unchanged policies – a sub-target figure signals an inclination to ease and vice versa. The forecast was 2.0% in August and looks unchanged in November, based on the fan chart (the Bank refuses to publish the numbers until a week after the Report). So policy remains stuck in neutral despite recent upside growth and inflation surprises. (The gilt market, bizarrely, was discounting a shift to an easing bias, judging from today's sell-off.)

• CPI inflation is now expected to rise further to about 3.5% in the first quarter of 2011 compared with a forecast of 3.0% in the August Report, reflecting commodity price gains and a weaker exchange rate. It remains at or above the 3.1% letter-writing threshold until late 2011, implying that Governor King will have to wheel out his "temporary shocks" argument in at least four further missives to the Chancellor (including one next week following the October CPI report).

• The 3.5% first-quarter forecast is above consensus but probably still too low – a previous post suggested a rise to about 4% by early 2011 based on high VAT pass-through and transmission of recent food and energy commodity price increases.

• The GDP growth forecast looks little changed from August, implying a mean expectation for 2011 expansion of about 2.5% compared with the OBR's 2.3% assumption, i.e. not materially different. Claims that the Bank is significantly more optimistic based on its modal forecast are wrong, ignoring a downward risk skew. The OBR is hardly a fount of wisdom, with its June projection of 1.2% growth in 2010 far below a likely outturn of 1.8%.

• In a press conference reply, Governor King claimed that the MPC is required to set policy to achieve 2% inflation in two or three years' time but the remit states that the target applies "at all times" and makes no reference to the exclusion of "temporary shocks". The November Report mean forecast implies that consumer prices will rise by more than 2.5% per annum over the coming two years.

• The September level of the CPI was 3.2% higher than if the Bank had achieved 2% inflation since the target was switched from RPIX in December 2003. The Bank's forecast implies that this overshoot will increase further, to about 4.5% by the end of 2012. Has inflation targeting become meaningless?