Probability of low inflation in 2016 on the rise

27 November 2015

  • 75 per cent chance inflation will be less than one per cent in 2016
  • One-in-three chance UK will suffer deflation next year
  • Robust growth is forecast for 2015 and 2016
  • Growth between two and three per cent expected for 2015

The probability that UK inflation will stay at low levels through 2016 has increased after the second estimate for GDP growth released by the Office for National Statistics (ONS) was added to the macroeconomic data published in the last three months, according to the Warwick Business Forecasting System (WBSFS)

WBSFS continues to forecast robust economic growth for 2015 and 2016 but also estimates a three-in-four chance of inflation being less than one per cent in 2016, higher than the one-in-two chance forecast a quarter ago.

Instead of using a single forecasting model or relying on the judgement of the Bank of England’s Monetary Policy Committee, the WBSFS combines a group of state-of-the-art econometric models to produce judgement-free macroeconomic forecasts for UK GDP growth and CPI inflation. These forecasts are updated each quarter to reflect the latest data.

By using model averaging, following well-established methods in statistics, meteorology and economics, the WBSFS takes a weighted combination of each models’ forecasts, where higher weights are awarded to models which show the better recent forecasting performance. The WBSFS quantifies and communicates the forecast uncertainties by producing probabilistic forecasts. 

WBSFS graph
On the rise: The WBSFS calculate that growth will most likely be between two and three per cent in 2016, but inflation is likely to be less than one per cent with a one-in-three chance of deflation

 

Ana Galvao, Professor of Economic Modelling and Forecasting and part of the Economic Modelling and Forecasting Group  (EMF) at WBS, said: “Despite robust economic growth in 2015, which we expect to continue into 2016, our latest forecasts continue to place a higher probability on the currently low inflation in the UK persisting, consistent with the Bank of England and other forecasters having revised down their own inflation point forecasts in recent months.

"We forecast nearly a one-in-three chance of deflation in 2016. We attach only a negligible probability to inflation exceeding three per cent in 2016.”

Anthony Garratt, Professor of Economic Modelling and Forecasting and also of the EMF Group, said: “Despite global uncertainties economic prospects for 2016 remain strong in the UK with the most likely outcome being GDP growth of between two and three per cent and as such our 2016 growth forecasts are broadly in line with the latest forecasts from the OBR. Furthermore, there is a one-in-three chance that growth exceeds three per cent.”

The EMF's James Mitchell, Professor of Economic Modelling and Forecasting, added: “Our latest forecasts point to more consensus across economic forecasters, including the OBR and the Bank of England, about UK GDP growth than inflation prospects.

"While it is reassuring that there is increased confidence that economic growth will continue through 2016, forecasters do differ in the degree to which they believe this robust growth will be underpinned by low inflation. The WBSFS suggests inflation is more likely than not to fall beneath the latest central forecasts from the Bank of England and the OBR.”

Professor James Mitchell teaches Economics of the Business Environment on the Warwick Global Energy MBA and Managing in a New World on the Warwick MBA by full-time study

Professor Anthony Garratt teaches Business Economics on Warwick Business School's Undergraduate programme, Economics for Management and Business on the MSc Management course and The Economics of Overseas Business Investment on the Executive MBA, which is also taught at WBS London.

Professor Ana Galvao also teaches Business Economics on Warwick Business School's Undergraduate programme, Economics for Management and Business on the MSc Management course and The Economics of Overseas Business Investment on the Executive MBA, which is also taught at WBS London.

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