Those policy simulations could be complemented by controlled trials of policies, the like of which have been successfully pioneered by the What Works Centre for Local Economic Growth.55  The economy is a complex, adaptive system. Behaviour in those systems is difficult to predict ex-ante, especially at times of policy change; it is emergent, just as a hurricane or tornado is emergent. Often, our policy intuition about complex systems is simply wrong. No model, however micro-founded or data-rich, is proof against those uncertainties. But one that embodies complex, micro-level dynamics is more likely to do so than one without them. A complex systems framework can make for robust policy choice. That was Jay Wright Forrester’s insight in the 1950s. We know it to be true from more recent experience. The real-time, supply-chain data system developed by Walmart twenty years ago transformed inventory management, at Walmart and elsewhere. The real-time micro-level models developed by meteorologists transformed weather-forecasting at around the same time. Today, digital twinning is transforming processes across companies. These are microcosms of what might be achievable at the macroscopic scale. 55  For example, What Works Centre for Local Economic Growth (2018). 43  All speeches are available online at www.bankofengland.co.uk/speeches  43  Can a Central Bank be Local? Finally, what are the implications of these local economic perspectives for central bank policy? On the face of it, these might seem few. Central banks are national agencies. Their policies, such as interest rates, can only be set at the national level.
Information about future demand and supply levels ought to be reflected in the current price and in the prices of commodity futures. But the increases from Autumn 2010 onwards were largely unexpected, and have been a genuine surprise for our forecasts. For example, spot oil and gas prices have risen very substantially since their low points in 2009.2 Spot oil prices are well above the levels implied by futures prices at the time of the February Inflation Report (Chart 2). Gas futures prices have also moved markedly higher since then (Chart 3). Chart 2  Chart 3  Sterling oil prices(a)  Sterling gas prices(a)  Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Futures prices for February and May are averages during the fifteen working days to 9 February and 4 May respectively. Each futures curve assumes that the sterling-dollar exchange rate remains constant at its average during those periods. (a) Futures prices for February and May are averages during the fifteen working days to 9 February and 4 May respectively. (b) One-day forward price of UK natural gas. (b) Brent forward prices for delivery in 10–21 days’ time converted into sterling. Third, we have been experiencing the ongoing effects of sterling’s fall during 2007 and 2008, when the nominal effective exchange rate fell by around 25% (Chart 4).