Forecast changes in the February Inflation Report look internally inconsistent.

The MPC slashed its near-term inflation forecast to take account of recent commodity price weakness, with the annual CPI change now expected to fall to about zero in the second and third quarters of 2015. Surprisingly, it also lowered its medium-term projection: inflation in the first quarter of 2017, for example, is now forecast at 2.2% assuming unchanged policy, down from 2.4% in November.

The latter reduction is inconsistent with a significant downward revision to the MPC’s estimates of current and future spare capacity. Slack is estimated to be only about 0.5% of GDP at present, down from 1% in November, and is forecast to be eliminated within 18 months, versus two to three years previously.

Earlier elimination of spare capacity contributes to a stronger pick-up in average earnings growth, which reaches 3.5% and 4% in the fourth quarters of 2015 and 2016 respectively, a quarter-point higher than in November in both cases. With productivity assumptions little changed, unit labour cost growth climbs to 2% in late 2015 and 2.75% a year later.

Unit labour cost growth of 2.75% by late 2016 is incompatible with inflation remaining close to 2% in 2017, barring a major profits squeeze or further fall in import costs. The MPC may resolve this contradiction by raising its medium-term inflation forecast in May – after the general election.