An Assessment of Bank of England and National Institute Inflation Forecast Uncertainties

Kenneth F. Wallis

National Institute Economic Review, 2004, vol. 189, 64-71

Abstract: In February 1996 the Bank of England and the National Institute of Economic and Social Research significantly increased the amount of information they published about the uncertainty surrounding their central projections of inflation. In effect, and in different ways, they each began to publish a density forecast of inflation, that is, an estimate of the probability distribution of possible outcomes for future inflation. The Bank represented this graphically, as a set of forecast intervals covering 10, 20, 30, …, 90 per cent of the probability distribution, coloured red, of lighter shades for the outer bands. This was done for inflation forecasts up to eight quarters ahead, and since the distribution becomes increasingly dispersed and the intervals ‘fan out’ as the forecast horizon increases, the chart became known as the ‘fan chart’ (or, rather more informally, and noting its red colour, the ‘rivers of blood’). The National Institute represented the distribution as a histogram, in the form of a table reporting the probabilities of inflation falling in various ranges. These intervals, or ‘bins’ of the histogram, have changed from time to time; those used currently are: less than 1.5 per cent, 1.5 to 2.0 per cent, 2.0 to 2.5 per cent, and so on. The forecasts refer to the fourth quarters of the current and following years, and from the beginning have included not only inflation but also real GDP growth. Fan charts for real GDP growth first appeared in the Bank's Inflation Report in November 1997.

Date: 2004
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