The art of forecasting inflation for all seasons

COMMENT

Whatever its practitioners may claim, economic forecasting has always been an art rather than a science. Now the Bank of England has turned its latest inflation projection into a work of modern art (see graphic, opposite page), worthy to hang on the walls of the Tate Gallery. We may not be talking Cezanne here, but we certainly have a talking point.

The picture of inflation, past and future, looks rather like a river with its wiggly but mainly downward course over the past four years spreading into a majestic delta of uncertainty over the next two years. There again, it could be taken to depict a hosepipe indiscriminately spraying a wall of future inflation numbers.

All is in the eye of the beholder. For Mervyn King, the Bank's chief economist, it is a contour map that shows the relative likelihood of possible inflation outcomes. City cynics are more likely to see it as a way of covering the Bank's back against criticism, for what has been devised is a variant of an old excuse for erroneous economic forecasting - that it was right at the time but circumstances changed. Mr King's variant factors in all possible changes, bar war and pestilence, and comes up with the perfect solution - a forecast for all seasons.

Whatever your view, the Bank is on a losing wicket if it thinks it can educate the public into understanding forecasts as probability distributions. If three in four adults bet on the lottery every week despite the odds, the new mission is a lost cause. The downside - to use that favourite phrase of forecasters - is that the initiative marks a retreat into obscurantism that will further reduce the Bank's influence.

Yet strip away the fog and an unexpectedly clear message emerges from the Bank's latest foray into the future. For the first time in a year, inflation is projected to hit the Government's target of 2.5 per cent or less in two years.

Two conclusions follow immediately. Firstly, this suggests that Eddie George did validate, however grudgingly, Kenneth Clarke's surprise follow- up cut in interest rates in January. Secondly, despite routine protestations, the Bank is signalling a green light to further rate cuts. Such a reduction could come as soon as 7 March when the Chancellor and Governor next meet to decide monetary policy.

It is true that Mr George's formally stated position is that he has to be very confident that inflation will come in below the inflation target to cut rates. The Bank's judgement set out in the Inflation Report is much more circumspect - that it is "a little more likely than not" that inflation will be below 2.5 per cent in two years. On the basis of the Governor's evidence to the Treasury Select Committee last year, this implies the Bank may be considering an easing in monetary policy, but not necessarily recomending it.

This may be a nuance too far, but consider: rates have come down by half a point since the Inflation Report in November when the central projection was still that the target would be missed. Furthermore, the Bank is now warning of the possibility of a more protracted period of slow growth in 1996 because of a downturn in Europe.

The Bank says it has shifted its ground because economic growth turned out to be so much weaker in 1995 than initial readings of activity suggested. However, the clear impression is that it remains scarred by the experience of picking a fight with the Chancellor - and losing it. What this in turn suggests is that the Bank will have to be very confident of its ground before it squares up to another battle.

Procter gambles on own-label challenge

If at first you don't succeed ... Over the years, the big consumer product groups have tried every trick in the book and some to halt the encroachment of own-label products on their treasured leading brands. There have certainly been some corkers among them. "Space packing" was one of the best, a concept largely invented by Unilever, which like Procter & Gamble, has stoically refused to join the rush into own-label products. Here the idea is to split what is essentially one product, say margarine, into a legion of different products, each with its own marketing and advertising budget, in the hope of giving the illusion of consumer choice and using up so much space on the shelf that nobody else gets a look in. Then there is the special promotion, you know the sort of thing - buy two, get one free.

All to no avail. Nothing, apparently can halt the onwards and upwards march of the supermarket own-label brand. Some of these, deliberately dressed up to look exactly like the brand leaders, are so powerful that they have become brands in their own right. How to respond? Procter & Gamble has been operating an "every-day low pricing" policy in the US for some little while. Now it plans to introduce it to Britain, which means price cuts of nearly 10 per cent on products like Fairy Liquid and Flash. The effect is to all but wipe out any price differential between these products and leading own-label brands. For Procter & Gamble, this is a costly initiative, but it may be the only way to stop further erosion of its market position by big supermarket groups.

It is hard to put a precise date on it, but some time in the immediate post-war period the real power in the market place began to swing from the producer to the distributor, from manufacturer to retailer. The growth of own-label has made the process more or less complete.

In most developed countries, the big retailers these days call the shots and rule the roost in all but fashion items and high-cost, state-of-the- art consumer products such as PCs.

In this country the process has been accentuated by the very high levels of profitability commanded by the large chains. Planning restrictions have put very real limits on competition; this in turn has enabled the big supermarket groups to sustain much higher margins than are common, say in the United States. According to Ken Simmonds, Professor of Marketing at the London Business School, the effect has been to accentuate the growth in own-label since the retailer has the margin to make such encroachment possible.

That may be changing, however. Planning restrictions notwithstanding, there are now many more hypermarkets and despite the spot of bother encountered by Safeways in Bath, more are being built all the time. Research undertaken by Procter & Gamble shows that typically consumers will now do their weekly shop at as many as five different locations over an eight-week period.

The variety of different prices and products they encounter has led to confusion and greater price consciousness. Procter & Gamble's aim in matching own-label prices is to try to achieve some price consistency across locations and thereby begin to rebuild brand loyalty.

Everything else has been tried so it's worth a shot. But there may be more to it than that. It may be that with traditionally fat retail margins under growing pressure, the lure of own-label is beginning to fade. Just think of it, Kit-e-Kat might even make a comeback.