Ben Broadbent: Mismatch

Speech by Mr Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England, at the Bank of England, 22 July 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction and summary

Good morning.

We're going through a period of very rapid economic growth. On a reasonable estimate GDP in the second quarter of this year was probably around 5% higher than in the first and more than 22% higher than a year earlier. That's easily the fastest year-on-year rate of growth since quarterly estimates began in the mid-1950s, and probably a long time before that as well.

We know that rapid growth in demand tends to put upward pressure on prices. So with numbers like these perhaps it's not surprising to see inflation going up, here and in other countries. In the UK, annual CPI

inflation has risen from ½% to 2½% in the past four months. That's more than half a percentage point higher than in late 2019, immediately before the pandemic. The MPC expects inflation to rise significantly further, to well over 3%, over the next six months.

But in some ways the extent of the rise is a bit surprising. The economy may have grown very strongly over the past year but that's only because it contracted so spectacularly in the first half of 2020, during the first phase of the pandemic. Even now, it's still a long way from where it was before all this began. Growth of 5% in Q2 would still leave UK GDP 4% lower than at the end of 2019. And economic contractions don't normally lead to higher inflation. We can identify a number of contributory factors, things that help to account for this contrast, right off the top.