The Bank's quarterly Inflation Report was first published in 1993. The Report sets out the detailed economic analysis and inflation projections on which the Bank's Monetary Policy Committee bases its interest rate decisions, and presents an assessment of the prospects for UK inflation.

OVERVIEW
In the United Kingdom, output growth eased in the second quarter and surveys pointed to further slowing in the third. Consumer spending appeared to decelerate as households’ real incomes were squeezed. Residential and business investment prospects deteriorated.

Global economic activity was a little firmer than expected, but the near-term outlook for the advanced economies remained subdued. Under the assumption that Bank Rate moves in line with market yields, the Committee’s central projection is for output to be broadly flat over the next year or so, after which growth gradually recovers. But there is a risk that the slowdown may be more pronounced.

CPI inflation rose markedly. Energy and import cost pressures increased. Some measures of household inflation expectations rose. Earnings growth remained moderate.

In the central projection, higher energy, food and import prices push inflation substantially higher over the next few months. Inflation then falls back sharply to a little below the 2% target in the medium term, as the contribution from energy, food and import prices wanes and the margin of spare capacity increases. But considerable uncertainty surrounds this outlook.

The main risks to inflation — from a more pronounced slowdown in demand on the downside, and from the possible impact of a prolonged period of elevated inflation on pay pressures and inflation expectations on the upside — have both increased since the May Report.

Overall, the balance of risks to inflation is judged to be on the upside.

Download Bank of England Inflation Report, August 2008

PDF format, 3.3MB, 56Pages.

CONTENTS
Overview 5
1 Money and asset prices 9
1.1 Financial markets and asset prices 9
1.2 Credit conditions 13
1.3 Monetary aggregates 15
Box Monetary policy since the May Report 10
Box Money, credit and deleveraging 16
2 Demand 18
2.1 Domestic demand 19
2.2 External demand and net trade 22
3 Output and supply 24
3.1 Output 24
3.2 Capacity pressures within businesses 25
3.3 Pressures within the labour market 27
Box The sensitivity of GDP growth to developments in construction 26
4 Costs and prices 30
4.1 The near-term outlook for inflation 30
4.2 Inflation expectations 33
4.3 Labour costs 35
4.4 Companies’ pricing decisions 36
Box Recent trends in oil demand and supply 32
5 Prospects for inflation 37
5.1 The projections for demand and inflation 37
5.2 Risks to demand 40
5.3 Risks to inflation 42
5.4 The balance of risks 44
5.5 The policy decision 45
Box Financial and energy market assumptions 38
Box The MPC’s recent forecasting record 46
Box Other forecasters’ expectations 48
Index of charts and tables 49
Press Notices 51
Glossary and other information 52

Visit Bank of England Inflation Report Website

In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%.

Subject to that, the MPC is also required to support the Government’s objective of maintaining high and stable growth and employment.

The Inflation Report is produced quarterly by Bank staff under the guidance of the members of the Monetary Policy Committee. It serves two purposes. First, its preparation provides a comprehensive and forward-looking framework for discussion among MPC members as an aid to our decision making. Second, its publication allows us to share our thinking and explain the reasons for our decisions to those whom they affect.

Although not every member will agree with every assumption on which our projections are based, the fan charts represent the MPC’s best collective judgement about the most likely paths for inflation and output, and the uncertainties surrounding those central projections.

This Report has been prepared and published by the Bank of England in accordance with section 18 of the Bank of England Act 1998.

The Monetary Policy Committee:
Mervyn King, Governor
Rachel Lomax, Deputy Governor responsible for monetary policy
John Gieve, Deputy Governor responsible for financial stability
Kate Barker
Charles Bean
Tim Besley
David Blanchflower
Andrew Sentance
Paul Tucker

Glossary of selected data and instruments

AEI – average earnings index.
AWE – average weekly earnings.
CDS – credit default swap.
CPI – consumer prices index.
CPI inflation – inflation measured by the consumer prices index.
ERI – exchange rate index.
GC – general collateral.
GDP – gross domestic product.
LFS – Labour Force Survey.
Libor – London interbank offered rate.
M4 – UK non-bank, non-building society private sector’s holdings of sterling notes and coin, and their sterling deposits (including certificates of deposit, holdings of commercial paper and other short-term instruments and claims arising from repos) held at UK banks and building societies.
PMI – purchasing managers’ index.
RPI – retail prices index.
RPIX – RPI excluding mortgage interest payments.
SVR – standard variable rate.

Abbreviations
A8 Accession countries – the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia.
BCC – British Chambers of Commerce.
CBI – Confederation of British Industry.
CIPS – Chartered Institute of Purchasing and Supply.
FTSE – Financial Times Stock Exchange.
GfK – Gesellschaft für Konsumforschung, Great Britain Ltd.
HBF – Home Builders Federation.
IMF – International Monetary Fund.
ISA – individual savings account.
LTV – loan to value.
M6 – Canada, France, Germany, Italy, Japan and the United States.
MPC – Monetary Policy Committee.
MTIC – missing trader intra-community.
OFCs – other financial corporations.
ONS – Office for National Statistics.
OPEC – Organization of the Petroleum Exporting Countries.
PNFCs – private non-financial corporations.
PwC – PriceWaterhouseCoopers.
R&D – research and development.
RICS – Royal Institution of Chartered Surveyors.
S&P – Standard and Poor’s.
TFP – total factor productivity.
UIP – uncovered interest parity.

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