Chart of the Day: Why the core inflation outlook is more benign than expected

It will move below 1.5% for some time this year.

The central bank’s almost unprecedented decision to shift policy ahead of the regular April meeting came as a surprise.

According to a report by J.P. Morgan, the move suggests recognition that the core inflation outlook is both more benign than previously assessed and—more importantly—was becoming increasingly inconsistent with the previous policy stance.

J.P. Morgan says that the last time the central bank altered policy at an unscheduled meeting was almost 14 years ago, amid the 2001 dot-com bubble and ensuing recession, when it widened the policy band and noted that “the downturn will be more protracted and severe than earlier anticipated”.

Here’s more from J.P. Morgan:

The growth outlook in 2015, while modest, is clearly still some way from the recessionary environment of 2001—thus we think the decision to move policy between meetings underscores the degree to which the central bank has been surprised by the inflation dynamic.

In this context, the statement noted that “while the underlying cost pressures stemming from a tight labour market have remained, the pass-through to consumer prices has to date been slightly weaker than anticipated,” and “the extent to which businesses will pass on accumulated costs to consumer prices could be somewhat constrained in the near term by the moderate economic growth environment”.

We agree with these assessments, but also reiterate our long-standing view that real-estate related disinflation, particularly in the industrial sector, will continue to temper core inflation.