Markets have interpreted the August Inflation Report as signalling further delay in monetary policy normalisation. Bank of England Governor Mark Carney’s press conference remarks admittedly gave little encouragement to those expecting the first rise in Bank rate to occur this year. The Inflation Report forecasts, however, imply that the Monetary Policy Committee (MPC) as a whole has revised up its assessment of the amount of policy tightening needed to meet the inflation target over the medium term.

A summary measure of whether policy is on track to hit the target is the mean forecast for inflation two years ahead based on unchanged policy. This rose from 2.35% in May to 2.52% in August – the highest since May 2011, when three out of nine MPC members voted to hike Bank rate.

The 0.52 percentage point deviation of the two-year-ahead forecast from the target, indeed, has been matched or exceeded in only three out of 69 Inflation Reports since the MPC’s inception in 1997 – see chart. The two other occasions when the MPC signalled a similar need to tighten – in 1997 and 1998 – were followed by a rate rise within four months.

Since May, the MPC has become more optimistic about near-term growth prospects while lowering – again – its projections for productivity and unemployment. These changes imply a faster erosion of slack and are consistent with the upwardly-revised inflation forecast based on unchanged policy.

The main counterargument deployed in the Report is the continued weakness of wage growth, suggesting a larger excess supply of labour than estimated in May. This permits the claim that economic slack is still “broadly in the region of 1% of GDP”, versus an assessment of 1.0-1.5% three months ago.

The Report states that “uncertainty about how much slack there is has increased” and “there is a wide range of views on the Committee”. The higher inflation forecast implies that the balance of opinion has shifted towards earlier and / or more policy tightening since May. Governor Carney chose not to draw attention to this shift, perhaps to avoid frontrunning next week’s minutes, which may reveal hawkish dissent.