The May Inflation Report confirms that the MPC is no longer setting monetary policy in accordance with its remit.

The key measure of whether the MPC is on track to meet its target is the mean inflation forecast based on unchanged policy. The mean forecast takes account of the balance of risks around the mode or central projection – as should the MPC if it is doing its job. The mean forecast, in other words, summarises the whole fan chart*.

The Bank withholds its forecast numbers until a week after publication of the Inflation Report. This results in media attention focusing on the central projection, which is easier to estimate from the fan chart than the mean and has been significantly lower in recent Reports.

In February, the mean forecast for inflation in two years’ time assuming unchanged policy was 2.48%, representing the largest overshoot of the target since February 1998 and clearly signalling the need for higher interest rates.  Based on chart 5.13 on p.47 of the May Report, the current two-year-ahead mean forecast remains at about 2.5%. The central projection is again below the mean but has risen from 2.08% to about 2.25%. So neither measure is consistent with the 2% target.

The chart below compares the path of the mean forecast estimated from the May fan chart with the published numbers from the February Report. The forecast has been raised in every quarter until the end of 2012 – average inflation over the next two years is now 3.5% versus 3.3% in February. The MPC's remit is 2% inflation “at all times”, not just at the two-year horizon.

A year ago, the view here was that inflation, far from heading for an undershoot as the MPC claimed, would remain above 2% for the foreseeable future, implying a need for policy tightening. The Bank now accepts this prospect but still the MPC remains inert. Many, including the Chancellor, will support the Committee’s approach but the pretence that policy is being set in accordance with "inflation targeting" should be abandoned.

*The Bank’s own advice is that “it is more appropriate to compare outturns with the MPC’s projection of the mean, rather than the mode or median”. See “Assessing the MPC’s fan charts”, Bank of England Quarterly Bulletin, Autumn 2005, p.332.