The CB shouldn’t have tried too hard to fail


It’s written on the top of the Central Bank’s (CB) official website that the primary objective of the Bank is to achieve and maintain price stability. Moreover, the expression ‘price stability’ is highlighted.

CB managers should go to their website and look at this phrase to remind themselves of their primary objectives. The CB released its fourth and last Inflation Report of 2022. It is unclear whether the report was about price stability, which is the primary objective of the CB, or about industrial production, employment, and growth.

We can already see that inflation is being blurred over because inflation forecasts are only mentioned cursorily in the report and estimations are revised in each report.

The last inflation report of the year is always released in the final days of October. So, forecasts for the two coming months are included in the fourth report, but the year-end rate may exceed the last forecast.

For example, year-end inflation for 2021, which was estimated at 18.4% at the end of October 2021, hit 36.08%.

Can the CB administration say they couldn’t know about that rapid hike in December? They can. But then the following question will be asked: What kind of central banker are you? Is your forecast so insufficient that foreign exchange rates will continuously surge and this will raise inflation, while the policy rate is continuously cut?

The CB estimated the annual inflation at 9.4% for 2021 in its first report of 2021. The forecast was revised to 18.4% but the annual inflation rose to 36%.

The year-end inflation was forecasted at 7% for 2022 in the first report of 2021. There is no mistake here. I wanted to emphasize this because now we see monthly inflation of 7% some months.

Let’s say that it’s hard to estimate this year’s inflation at the beginning of the previous year. Then what should we say about the forecast in the last report of 2021?

Year-end inflation was forecasted at 11.8% for 2022 in the report published in October 2021. Then, it was gradually revised to 65.2% in the last report of 2022. It’s obvious how this level will be reached: the annual rate will probably increase to 85-90% at the end of November, and it may fall to 65-70% as the record high level in December 2021 will be over.

Once again, a decline to these levels won’t mean that prices will decrease in December, as compared to November.

The annual rate will match up with the last forecast of this year. This will stem from how the high rate in December 2021 creates a clear base effect.

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