Mervyn King was hoping to give people something to smile about in his final economic forecast as the governor of the Bank of England – the kind of understated smile that only slightly stronger-than-expected growth and slightly lower-than-expected inflation can bring out.
When it comes to inflation, the Bank is predicting inflation will fall back to its 2 per cent target within two years. In February, it was forecasting 2.3 per cent over the same period.
But the departing governor did not underplay the challenge. Increases in university tuition fees and energy bills and other administered regulated prices, which added one percentage point to prices at the end of last year, are not going away.
“They are likely to push up on inflation over much of the forecast period, making the challenge of bringing CPI inflation back to 2 per cent more difficult, even if other domestic price pressures are contained,” went the governor’s opening remarks.
Still, the fact that we in the private sector are getting paid less, together with weakening external price pressures and other factors, should mean that inflation meets, or even falls below, that target over the forecast period.
What does that mean for pension funds? It can be misleading to make overarching statements about the impact of price movements on schemes’ financial health, because of the different rules governing the relationship between pension promises and inflation, as well as the interplay between prices and the various investments held in portfolios.
For instance, many schemes are now making use of real assets to protect them from the impact of price rises on their pensioner liabilities.
Our property and infrastructure series The Specialist, explores how schemes are approaching this market.
The Bank only has to predict where inflation might be over the next two or three years. Pension fund investors must think the new governor will have it easy.
Ian Smith is editor of Pensions Week. You can follow him on Twitter @iankmsmith and the team @pensionsweek
