The economy forecast

Inflation

This Forecast in-depth page has been updated with information available at the time of the March 2024 Economic and fiscal outlook.

We produce forecasts for the Consumer Prices Index (CPI inflation) and the Retail Prices Index (RPI inflation). The Government uses these measures in various ways. It has set the Bank of England a 2 per cent CPI inflation target. In terms of tax and spending, if the Government has not set another specific policy, CPI inflation is used in the income tax system to set the path for allowances and thresholds each year and in the social security system to uprate statutory payments for most working-age benefits. RPI inflation is used to set the path for most excise duty rates. RPI inflation also determines the amount of interest paid on index-linked government debt and interest charged on student loans.

We also forecast inflation at the whole economy level. This is required to produce a forecast for the cash size of the economy, which is the most important driver of our tax forecasts. The GDP deflator includes not only inflation related to consumer spending, but also to investment, trade and the activities of government.

The forecast process starts by thinking about CPI inflation prospects in the short and medium term, with different sets of models used at each of the two time horizons and their outputs combined. That provides the base for our RPI inflation forecast (which is produced by making various adjustments to get from CPI to RPI) and drives the consumption deflator forecast which is the largest component of the GDP deflator. The adjustments needed to get from CPI to RPI also allow us to forecast RPIX inflation.

  CPI inflation

Following the Russian invasion of Ukraine, and subsequent spike in energy prices, CPI inflation peaked in the fourth quarter of 2022 at its highest rate in around 40 years. Inflation has been falling recently and we expect it to continue falling and at a faster pace than in our November 2023 forecast over 2024 and 2025. Our central forecast sees CPI inflation at 2.2 per cent in 2024, 1.4 percentage points below the November 2023 profile. External factors drive most of the downward revision, particularly lower energy prices, alongside the announced freeze in fuel duty. We forecast inflation to hit the 2 per cent target in the second quarter of 2024, about a year earlier than we forecast in November. It then dips below target in the middle of the forecast, driven by further falls in energy costs, along with increasing spare capacity in the economy. Inflation then returns to target by the forecast horizon as output is broadly in line with the economy’s productive potential.

To forecast CPI inflation, we normally do three things:

  • First, we produce a short-term forecast, which extends over the first half year or so of the forecast. This is compiled from the bottom up by considering prospects for different sub-components of inflation (e.g. food or utility prices) – which over this horizon are heavily influenced by seasonal factors and base effects – and weighting them to get to a forecast for overall CPI inflation.
  • Second, we produce a medium-term forecast. Beyond the first couple of years of the forecast we typically assume that inflation returns to the 2 per cent target. The path of inflation back to target after our short-term forecast is informed by statistical models for individual elements of the CPI which are influenced by our forecasts for unit labour costs, exchange rates and the output gap.
  • Third, we add on the effects of new policies announced by the Government that we expect to affect inflation.

In each forecast we make judgements about how much weight to put on each of these approaches and any other factors that we expect to influence inflation prospects. Not all drivers of inflation will have the same effect on prices at all times, so we always need to consider each development on its merits – the forecast process is not a mechanical one of feeding new information into a model and letting it provide the answer.

Since the November 2022 EFO, we have forecast changes in the weights of categories of goods and services in CPI, based on their forecast share of nominal spending. This is so we could more accurately capture the significant changes in the consumption basket, and consequently CPI, driven by the large changes in energy prices. We follow the ONS methodology for calculating CPI weights[1], incorporating the impact of temporary changes to the ONS’ method introduced during the pandemic.[2] To get the forecast for nominal spending shares, we need to produce forecasts for real spending in each category as we already have forecasts for their price as part of our CPI forecast. Households cannot easily substitute away from energy when prices rise, so we assume that each 10 per cent increase in energy prices only results in a 1 percentage point reduction in growth in real expenditure on energy. We also assume that households cannot easily substitute away from essential goods and services (food and non-alcoholic beverages, rent and education) so these do not fall relative to overall consumption. Households can more easily substitute away from non-essential items so we assume that real spending on these items fall relative to overall consumption to offset spending on energy falling by less than overall consumptions. These effects all move in reverse when energy prices fall back.

Our CPI inflation forecast is broken down into several parts:

  • food and non-alcoholic beverages– these make up 11.6 per cent of the CPI in 2024.[3] Our medium-term forecast is informed by the past relationship between these prices, the exchange rate and global food and beverage prices. For the forecast, we assume sterling will be flat, while global food and beverage prices are normally informed by World Bank forecasts.
  • utility prices– 3.7 per cent of CPI. This forecast in the near-term is based on announced price changes by energy companies and affected by the Ofgem energy price cap. Over the medium-term we use an assumption based on changes in wholesale energy prices and other supplier costs.
  • fuels (including petrol and diesel) – 3.04 per cent of CPI. The main element of this forecast is petrol prices, which are influenced by global oil prices, the exchange rate and fuel duty policy.
  • rents– 8.1 per cent of CPI. This forecast has two parts. Social rents are based on future local authority housing policies (consistent with assumptions in our fiscal forecasts). Private rents are assumed to be influenced by average earnings and housing supply.
  • education– 3.0 per cent of CPI. Over recent years it has been affected by significant increases in university tuition fees, which pushed up education services inflation. Absent other policy changes, rises in these fees are assumed to be related to RPIX inflation.
  • tobacco and alcohol– 4.0 per cent of CPI. This forecast is heavily influenced by government policy on tobacco and alcohol duty rates.
  • other tradable goods– 35.8 per cent of CPI. This element covers items that are relatively import-intensive. We forecast it based on the past relationship between these prices, import prices (which in turn are influenced by exchange rates) and productivity.
  • other non-tradable goods and services– 30.7 per cent of CPI. This element covers items that are relatively less import-intensive, including most services prices. Transport services in this category are influenced by our forecasts for oil prices, while labour intensive services are influenced by outlook for whole economy average earnings.

[1]  See ONS, Consumer price inflation, updating weights: 2020

[2] See ONS, Consumer price inflation, updating weights: 2022

[3]These are the weights used in our March 2024 forecast. For the latest weights see ONS, Consumer price inflation, updating weights: 2024.

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  RPI inflation

The RPI measure of inflation differs from the CPI measure in a number of ways. One of these differences – the formula used in its construction – means that RPI does not meet international statistical standards.[1] It is typically higher than CPI inflation, with the difference between the two measures described as the ‘wedge’. We have published detailed analysis of the sources and size of this wedge, which relate not only to the formula effect, but also its coverage (RPI is slightly broader), different weighting of items in each index and some housing related variables not covered by CPI.

We forecast RPI inflation by adding a forecast for the wedge to our CPI inflation forecast described above. Some elements of the wedge are fairly constant over time, but others vary, with prospects for mortgage interest payments and other housing-related elements key sources of variation. These elements are forecast using our judgements about house prices, mortgage interest rates and mortgage debt.

[1] ONS, Response to the National Statistician’s consultation on options for improving the Retail Prices Index, February 2013.

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  RPIX inflation

RPIX inflation is a measure that excludes the mortgage interest payments component from RPI. Our forecast is therefore straightforwardly calculated from the steps taken to produce the headline RPI inflation forecast.

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  The GDP deflator

The GDP deflator is the broadest measure of domestic price movements. It comprises the prices of all domestically produced goods and services in the economy – including the prices of consumption goods and services (closely linked to CPI inflation), investment goods, government services, and exported goods and services, minus the price of imported goods and services.

To forecast the GDP deflator, we weight together forecasts for each of its components:

  • The private consumption expenditure deflator (62 per cent of the overall GDP deflator in 2023) forecast is largely determined by our forecast for CPI inflation, plus an adjustment for imputed rents, which are assumed to rise at their historical average rate;
  • The export and import price deflator (31 and minus 33 per cent) forecasts are each built up from forecasts for services, goods and oil prices. These are influenced by our forecasts and assumptions for the exchange rate, oil and other commodity prices, domestic labour costs, and foreign country inflation;
  • The government consumption deflator (20 per cent) forecast reflects the split of recent growth in nominal government consumption between the deflator and real components. During the pandemic, government consumption increased sharply in cash terms, but in real terms fell significantly (reflecting lower measured health and education activity due to the postponement of elective healthcare treatments in response to the pandemic and the closure of schools). This resulted in an increase in the measured price of government consumption in 2020, followed by negative growth in this deflator as public services activity recovered. As the effects of the pandemic have subsided, our current approach to the government consumption deflator forecast assumes a continuation of the pre-pandemic (2010 to 2019) pattern whereby total growth in nominal government consumption comprises around half real growth and half deflator inflation. We sometimes relax this assumption if we judge that applying it to the Government’s stated fiscal plans would lead to an implausible path for the overall GDP deflator, given that this would also affect our forecast for nominal GDP;
  • The investment deflator (19 per cent) forecast – made up of business investment, residential and government investment – is informed by trends in its components, as well as the outlook for consumer prices, house prices and average earnings; and
  • The forecast for the implied deflator for the change in inventories (typically less than 1 per cent) is largely judgement driven in the short term, while in the medium term is generally assumed to grow in line with the rest of the GDP deflator.

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  Working paper

pdf

Working paper No.2: The long-run difference between RPI and CPI inflation

November 29, 2011 – 354.62 KB

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Boxes

Within each of our key publications we include topical ‘boxes’. These self-contained analyses are unique to this publication and tend to cover recent developments in the economy or public finances that complement the main discussion of our analyses.

The demand- and supply-side effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2022 Economic and fiscal outlook, we adjusted our economy forecast to take into account plans for the energy price guarantee (EPG) and consider the impact of tax and spending measures on the supply side of the economy.

Presenting uncertainty in our forecasts

Chart 2B: Inflation scenarios
The outlook for inflation was highly uncertain at the time of our March 2023 forecast: the UK was experiencing the largest inflation shock since the 1980s, and the first significant shock in the era of independent inflation-targeting central banks. In this box, we reviewed the ways we have presented uncertainty in our successive EFOs, in particular our use of fan charts and scenarios.

Why has recent inflation been stronger than we forecast?

Chart A: Side-by-side charts: combination chart showing inflation, earnings and growth since 1970 and line chart showing inflation and energy-intensity-adjusted fuel prices
Our recent forecasts have significantly underestimated inflation outturns, with the March 2021 underestimation of inflation in 2022-23 being the largest difference between forecast and outturn since the OBR began forecasting in 2010. In this box we explored the reasons that might have driven these differences since our March 2022 forecast. In particular, we considered the extent to which the knock-on effects of higher energy prices on CPI inflation might have been higher than we originally assumed.

How gas demand and supply have responded to higher gas prices

Chart 2A: UK demand for and supply of gas
In response to the largest rise in energy prices in around 50 years, an immediate reduction in energy demand, and more gradual change in the composition of energy supply, might be expected. In this box we look at how the sharp rise in the household price of gas has changed households consumption of gas this winter as well as how the Russian invasion of Ukraine and the rise in wholesale gas prices has changed the UK's energy supply over the last year and how it may change further in the future. We then briefly outline how we forecast gas prices and why we do so.

The economic effect of policy measures

Chart 2A: Policy impacts on real GDP and its components
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2024 Economic and fiscal outlook, we adjusted our forecast to account for fiscal loosening and considered the effects of changes to taxation and increases in public investment.

The economic effects of policy measures

Chart 2B: Impact of policy measures on real GDP
In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2022 Economic and fiscal outlook, we adjusted our forecast to account for the loosening of fiscal policy, including a temporary capital allowance. And, we considered the effects of policy to boost employment on our potential output forecast.

The impact of bottlenecks in global product markets

Chart 2.A: Global and UK increases in input costs and goods prices
The recovery from Covid in the second half of 2021 was characterised by the emergence of imbalances between supply and demand in many markets. In this box we explored the impact of and outlook for these imbalances, or bottlenecks, in global product markets.

Economic implications of further instability in the Middle East

Chart 2B: Line chart and stacked bar chart showing CPI inflation in the adverse scenario
As tensions have risen in the Middle East, there has been increasing concern over the possibility of a wider escalation in the region and its implications on the UK economy. In this box we considered the economic growth and inflationary implications of an adverse scenario. In this scenario, supply chain disruption reaches levels not seen since the pandemic levels and energy costs rise sharply for a second time since the pandemic.

The source of inflation and its fiscal consequences

Line chart showing terms of trade and stacked bar chart showing inflation in 2023
In our November 2023 forecast we expect inflation to be both more persistent and more domestically generated than in March. In this box we explored the reasons behind our assessment for inflation to be more domestically rather than externally driven and its implications for the public finances.

Post-referendum forecast judgements

Post-referendum forecast judgements
In the November 2016 EFO we made a number of judgements about how the vote to leave the EU would effect the economy in the near-term. This box from our March 2018 EFO compared these judgements against the outturn data that we had received since then, finding that most of these judgements were broadly on track.

The performance of past OBR economic and fiscal forecasts

In October 2011, we published our first Forecast evaluation report (FER). This box summarised the key findings, including a discussion of weaker than expected GDP growth and why, despite this, public sector borrowing has fallen broadly as we expected it would.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2021 Economic and fiscal outlook, we adjusted our economy forecast to take into account plans to loosen fiscal policy from 2022-23, as well as for several specific measures, including the impact of the HSC Levy on earnings.

External agencies’ forecast evaluations

External agencies’ forecast evaluations
Each autumn, we publish our Forecast evaluation report (FER), a detailed examination of the performance of past economic and fiscal forecasts relative to the latest outturn data. This box discussed the OECD's and Bank of England's forecast errors, their explanations for these errors, and the lessons forecasters have learnt from the errors.

How does the Russian invasion of Ukraine affect the UK economy?

Chart 2.B: UK and global energy market indicators
Russia’s invasion of Ukraine in the run-up to our March 2022 Economic and fiscal outlook represented a significant adverse shock, primarily via a sharp rise in gas and oil prices. In this box, we considered where the UK gets its energy from and the channels through which higher energy prices raise inflation. We then set out how the economic shock from the invasion had been reflected in our forecast as well as several potential channels through which the invasion could affect the UK economy that our forecast did not explicitly capture.

How has the story changed since last year?

How has the story changed since last year?
In our 2012 Forecast Evaluation Report, we noted that nominal GDP had held up closer to our June 2010 forecast than real GDP, helping to explain why our fiscal forecasts out to 2011-12 had remained broadly on track. This box in our 2013 Forecast Evaluation Report discussed how this assessment changed in light of revisions to GDP data. While nominal GDP now appeared to be weaker than forecast, the relatively tax-rich components - such as nominal consumption and wages and salaries - held up relatively well.

Economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2020 Economic and fiscal outlook, we adjusted our economy forecast to account for the material increase in departmental spending and tax policy changes on GDP and inflation. In addition to this, our business investment forecast incorporates the reversal of the planned cut in corporation tax, increases in the structures and buildings allowance and R&D tax credits.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2022 Economic and fiscal outlook, we adjusted our economy forecast to take into account plans to loosen fiscal policy from 2022-23, to support households with the cost of living crisis, as well as for several specific measures, such as the cut in fuel duty and the freezing of the BBC liscence fee.

Impact of post-referendum rise in inflation on the public

Impact of post-referendum rise in inflation on the public
One unforeseen economic development affecting our March 2016 forecast was the upside surprise in inflation in 2017-18 as a result of the fall in the exchange rate. This box described the effect of that surprise on receipts, spending and borrowing.

The long-run difference between RPI and CPI inflation

Chart 2D: Housing costs, private rentals, and the RPI-CPI and CPIH-CPI wedges
As as result of the shortcomings with the methodology for calculating the Retail Prices Index (RPI), the ONS's current plans are to address these by bringing the methods and data sources from the Consumer Prices Index including owner occupiers' housing costs (CPIH) into the RPI in February 2030. In this box, we explained how this change would impact our estimate of the long-run difference between RPI and CPI inflation.

The impact of policy changes on the economic forecast

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2011 Economic and Fiscal Outlook, we made adjustments to our forecast of inflation.

Forward guidance by the Monetary Policy Committee

On 7 August 2013, the Bank of England announced that it would not consider raising Bank Rate, then at 0.5 per cent, until the unemployment rate had fallen to 7.0 per cent. However, the Bank also detailed certain conditions, which if breached, would make it consider tightening monetary policy sooner. This box, from our December 2013 Economic and fiscal outlook, examined where our forecast stood in relation to these conditions.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the July 2015 Economic and fiscal outlook, we made a number of adjustments to real and nominal GDP, the labour market, inflation, business and residential investment, and the housing market.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2013 Economic and Fiscal Outlook, we adjusted our inflation forecast to reflect changes in fuel duty.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2013 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, business investment and inflation

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2014 Economic and Fiscal Outlook, we made adjustments to inflation and business investment.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2015 Economic and Fiscal Outlook, we made adjustments to nominal GDP, inflation and North sea production.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2017 Economic and Fiscal Outlook, we adjusted our economy forecast for the effects of reducing the ‘personal injury discount rate’.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2012 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, business investment and inflation.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In the 2015 Autumn Statement and Spending Review, we made a number of adjustments to real and nominal GDP, the labour market, inflation, and the housing market.

The economic effects of supply bottlenecks

Chart 2.D: Shifting demand and bottlenecks to supply are impacting prices
In October 2021 commentators became increasingly concerned that the inability of supply to keep up with demand in specific areas of the economy would hold back the recovery. In this box we examined these 'supply bottlenecks' in energy, product and labour markets, discussing their consequences for wage and price inflation.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2014 Economic and Fiscal Outlook, we made adjustments to property transactions and residential investment in light of reforms to stamp duty land tax

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our October 2018 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and inflation, the effects of capital allowances on business investment, the effects of tax policy changes on inflation and the effects of the extension of the Help to Buy scheme on the housing market.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2016 Economic and Fiscal Outlook, we made a number of economy forecast adjustments to GDP, business investment, wage growth, inflation and the housing market.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2016 Economic and Fiscal Outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP and the effects of tax policy changes on inflation.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our December 2012 Economic and Fiscal Outlook, we made adjustments to our forecasts of real GDP, inflation and property transactions

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2017 Economic and fiscal outlook, economy forecast adjustments included the effects of looser fiscal policy on GDP, the effects of tax policy changes on inflation and the effects of stamp duty relief for first-time-buyers on house prices.

Developments in the outlook for household living standards

Chart 2.G: Real household disposable income per person
The cost of living has risen rapidly for households, with inflation reaching a 30-year high in January 2022 and the Russian invasion of Ukraine expected to increase inflation further. In this box we outlined our forecast for real household disposable incomes per person and explained that despite the Government's policy measures, 2022-23 is set to see the largest fall in living standards since ONS records began in 1956-57.

The economic effects of policy measures

In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our November 2011 Economic and Fiscal Outlook, we made adjustments to our forecasts of inflation and property transactions.

Why has inflation been higher in the UK than the euro area?

Why has inflation been higher in the UK than the euro area?
From late-2008 to 2013, the rate of CPI inflation in the UK had been consistently higher than the euro area equivalent measure. This box, published in our December 2013 Economic and fiscal outlook, outlined a number of factors which had contributed to the divergence including exchange rate movements, changes in VAT and utility prices.

Revised assumption for the long-run wedge between RPI and CPI inflation

Revised assumption for the long-run wedge between RPI and CPI inflation
RPI inflation differs from CPI inflation for a number of reasons. Collectively the difference between the two measures is refered to as the 'wedge'. In light of more evidence this box, from our March 2015 Economic and fiscal outlook, re-examined historical contributions to the 'wedge' and set out our latest assumptions for the long-run difference between the two measures.

Government consumption

Government consumption
In the two years before our December 2012 forecast, real government consumption held up more than we had expected, with reductions in nominal government consumption affecting prices to a greater extent than we forecast. This box set out how these outturns would have been affected by the way the Office for National Statistics measures real government consumption, a large part of which is based on 'direct' measures of government activity.

Consumer prices index excluding indirect taxes (CPIY)

Consumer prices index excluding indirect taxes (CPIY)
In the years prior to our March 2011 forecast there had been a number of changes to the rate of VAT, which affected CPI inflation. The Consumer Price Index excluding indirect taxes (CPIY) provides a measure of inflationary pressures excluding the effects that policy changes have on the CPI measure. This box considered how changes in VAT had contributed to the difference between CPIY and CPI at the time and what this meant for underlying inflationary pressures.

The economic effects of higher and more persistent inflation

Chart 2.G: CPI inflation and Bank Rate: central forecast versus alternative scenarios
Inflation risks intensified after we closed our pre-measures forecast for the October 2021 Budget. This box showed two stylised scenarios embodying higher and more persistent inflation than in our central forecast to highlight the uncertainty surrounding the outlook. In one scenario inflation was driven mainly by pressures in the product market, and the other mainly pressures in the labour market, which had different implications for wages and consumption.

The long-run differences between the CPI and RPI

The long-run differences between the CPI and RPI
One of the key differences between the CPI and RPI inflation measures arises from the formulae used to construct the indices. In the year leading up to our March 2011 forecast, the contribution of this 'formula effect' to the divergence between CPI and RPI inflation had increased. This box explained the possible implications for our long-run assumption about the CPI-RPI wedge and our inflation forecast.

The changing impact of fossil fuel shocks on the UK economy

Chart 3.A: The economic impact of the 1970s oil shocks compared to today
The recent surge in energy prices and its associated effects on inflation has led to comparisons with the last major global energy crisis in the 1970s. This box examined the ways in which the shocks are similar and how they are different, with a focus on how the UK economy in some ways has become more resistent to energy price shocks.

International comparisons of the government consumption deflator

International comparisons of the government consumption deflator
The government consumption deflator measures the implied price of government services. International comparisons show that different methodologies for deriving the government consumption deflator affect the extent to which nominal changes are interpreted as driven by changes in prices as opposed to volumes. This box outlined how these methodologies affected government consumption compared to pre-recession averages for six leading industrial countries.

ONS methodological developments on consumer prices

In 2012 the ONS carried out a range of methodological development work relating to consumer prices indices. This box summarised some of the key elements, including work addressing the 'formula effect' which had made an increasing contribution to the CPI-RPI 'wedge' in 2010 and 2011. This box also discussed ONS analysis and recommendations from Consumer Prices Advisory Committee on the appropriate measurement of owner occupiers’ housing (OOH) costs and their inclusion in a new index of consumer prices.

Why are receipts stronger since March?

Stacked line chart showing national accounts taxes (excluding PSNB neutral): Changes since March
We have made a significant upward revision to our pre-measures receipts forecast. This box explored the drivers behind the revision, which taxes drive the revision and how much of this change is due to real GDP, inflation and the effective tax rate.

Long run assumptions for National Account deflators

In recent years, the government consumption deflator had been weaker than we expected. This box set out our assumption that the weakness of the government consumption deflator was likely to persist over the forecast period. The box also reviewed the outlook for the household consumption deflator and explained our assumption that this would be broadly equal to CPI inflation in the long run. Taken together with our assumptions for other deflators, these assumptions implied a medium-term GDP deflator growth assumption of 2 per cent, revised down from a previous assumption of 2.5 per cent

Monetary policy, output and employment in alternative scenarios

In our central forecast, interest rates are assumed to evolve in line with financial market expectations. For alternative economic scenarios which involve different paths for the output gap and inflation, it is useful to specify rules for the way monetary policy is set and for how output and employment will respond. In this box, we set out the rules that governed those relationships in the scenarios we analysed in the March 2011 Economic and fiscal outlook: a persistent inflation scenario and a weak euro scenario.

May 2022 cost of living support package

In May 2022, the Government announced a package of measures to support households with the cost of living. In this box, we explained how we had adjusted our March 2022 Economic and fiscal outlook forecast for these policies.

The personal injury discount rate

The personal injury discount rate
In February 2017, just ahead of the Spring Budget and our March Economic and fiscal outlook, the Ministry of Justice announced that the ‘personal injury discount rate’ would be reduced from 2.5 to minus 0.75 per cent (in inflation-adjusted real terms). This box explained the direct and indirect effects of this change on our receipts and public spending forecasts.

Impact of inflation on the public finances

This box set out the various impacts that higher inflation has on the public finances. These include direct effects (e.g. on income tax and debt interest spending), the impact on nominal tax bases (such as household consumption) and the impact on departmental spending.

Higher inflation: effects on our central forecast and alternative scenarios

Chart 3.B: Public sector net borrowing effects of our alternative inflation scenarios
The level and nature of inflation has consequences for the public finances. This box explored the fiscal consequences of the sharp rise in inflation since our March 2021 forecast and examined the fiscal effects of the two scenarios described in Box 2.6 in our October 2021 EFO one where inflation is driven mainly by pressures in the product market, and the other mainly pressures in the labour market. The box concluded the labour market inflation scenario was significantly more beneficial for the public finances.

How a change to the RPI would affect our fiscal forecasts

By issuing gilts linked to the Retail Prices Index (RPI) the Government exposes itself to inflation risks on interest payments. In this box, we looked at how changes to the formula for calculating RPI would affect our forecast.