Beware simplistic solutions offered to grab votes in elections

SLOWER growth than previously forecast, higher inflation immediately ahead, and a hand resting on the emergency lever: the latest Bank of England's Inflation Report provides a grim reality check as the election battle heats up.

After the longest recession on record, some had hoped for a "V" or "U" shaped recovery. Yesterday Mervyn King, the Bank of England Governor, made clear it would be neither of these.

Instead, it is set to be slow, with output likely to remain below pre-crisis levels until well into 2011.

And he was explicit that further "quantitative easing" – injections of money into the banking system – is highly possible, particularly if the economy falters markedly over the coming months. "It is far too soon to conclude," he declared, "that no more purchases will be needed. So the monetary policy committee will keep its options open, and further purchases will be made if they prove necessary to keep inflation on track."

The Governor stressed the high degree of uncertainty surrounding the Bank's latest predictions – as well he should, given that the Bank's wayward forecasting record over the past year.

Only as recently as November it was forecasting that economic growth would hit 3.75 per cent year-on-year at the end of 2010 and 4.25 per cent year-on-year around mid 2011.

These have now been trimmed back to 3 per cent and 3.5-3.75 per cent respectively. And even these forecasts are regarded by most independent forecasters as being on the optimistic side.

On inflation, the forecasting track record is, if anything, more wobbly. Last May, the MPC forecast that consumer price inflation in the first quarter of this year would be running at an annual rate of 0.8 per cent. It now expects it to be 3-3.5 per cent.

The Bank's projections see inflation falling back below the target level of 2 per cent in the second half of the year and remaining below 2 per cent through 2011 and 2012. Indeed, inflation is seen around 1.2 per cent on the two-year policy horizon.

The virus of inflation, however, has a nasty habit of proving more difficult to bring under control for which forecasts of a "temporary blip" have historically allowed.

The baleful logic of the latest Inflation Report is that domestic demand will be so weak and the output gap between demand and capacity so great that inflation will remain subdued, a diagnosis akin to telling a hospitalised patient that continuing paralysis will help keep down the temperature.

This sobering report is essential reading for all the main parties as the election approaches. It serves as a reminder of the frailty of the UK's condition and that as much policy attention needs to be given to nursing the economy back into recovery as on taking firm action on a truly appalling fiscal deficit – up at Greek levels as a share of GDP.

This will be a most difficult balance to strike even before allowing for a ferocious election campaign and the tendency of such campaigns to lunge at simplistic solutions.