The Bank of England’s (in)famous inflation fan charts are at risk!
In a Monday lecture, Mervyn King, the bank’s governor, mused on how the BoE communicates information to the masses. Horror of horrors, King suggests possibly replacing the fan charts — the source of much FT Alphaville amusement — with the monstrosities shown below:
That is a ribbon chart and a(n abominable) 3-D fan chart.
The more obvious method of guiding the public’s inflationary expectations — by publishing a single (numbered) forecast– simply will not do, according to the governor. Single number forecasts have a high probability of being incorrect, and the distribution itself is important, he says.
Instead, a probability ribbon would be able to show “a range estimate of the probability that inflation will exceed target.” For instance, in the above chart, the BoE’s Monetary Policy Committee thought the chance that inflation would be 2 per cent or higher in the first quarter of 2011 was 15 to 20 per cent.
The 3-D fan chart, meanwhile, is meant to display the probability density along with the inflation forecast. So, for example, when inflation expectations are very narrow, i.e. not so far out in time, probability density is higher, since the MPC is more confident about its central forecast. Horrendous.
The possible changes have been greeted with (misguided) elation by some.
FT Alphaville is therefore taking this opportunity to begin the official `Save the fan chart‘ campaign.
Donations can be mailed to our non-existent PO Box. One pound £100 will help provide cucumber sandwiches for our company of pro-fan chart campaigners, currently girding themselves for a mass demonstration outside the BoE, and help provide shelter for any temporarily displaced fan charts.
The fan charts need your help!
Related link:
Bank of England: big pictures, small minds – Money Supply