Abstract:
The Bank of England badly mis-forecast UK annual consumer price inflation as it rose rapidly from 2021, prompting a review by Ben Bernanke. This raised many important issues, but other crucial problems were not addressed, as we discuss. Unpredictable shocks explain some of the bank’s forecast failures, but tardy reactions also mattered. We show that successive large and increasing same-sign one-step-ahead forecast errors contain the information to estimate broken trends, applied to forecasting the UK’s inflation over 2021–24. Compared with Bank of England projections, substantial gains in forecast performance can be made by rapidly detecting trend breaks and updating forecasting models when they occur.
Citation:
Castle, J. L., Doornik, J. A., & Hendry, D. F. (2025), 'Could the Bank of England have avoided mis-forecasting UK inflation during 2021–24?', International Journal of Forecasting, https://doi.org/10.1016/j.ijforecast.2025.07.001