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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