The Inflation Report projections: understanding the fan chart

Quarterly Bulletin 1998 Q1
Published on 01 March 1998

By Erik Britton, Paul Fisher and John Whitley of the Bank’s Conjunctural Assessment and Projections Division.

The introduction of an inflation-targeting regime for UK monetary policy in 1992 has placed more emphasis on taking a forward view of inflationary pressure. That forward view is inevitably best described by producing and presenting an explicit forecast for inflation. Between February 1993 (when the Inflation Report was first published) and February 1996, the Bank of England published a two years ahead forecast for the inflation rate in the form of a chart (see Chart 1) showing a path for the central projection of inflation. That chart also gave a measure of the range of uncertainty, as indicated by a blue shaded area around the central projection. The range of uncertainty was based on forecast errors from the previous ten years. The edges of this shaded area were derived by adding to (and subtracting from) the central projection the average absolute value of past forecast errors. Normally, one would have expected the outturn for inflation to lie within the blue area just over half of the time.

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