Ben Broadbent: The inflationary consequences of real shocks

Speech by Mr Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England, at the Imperial College, London, 20 October 2022.

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

Accompanying annex to the speech

Introduction and summary

Between them, the Covid-19 pandemic and Russia's invasion of Ukraine have inflicted significant damage on the UK's national income. Today I want to look at the link between these extraordinary shocks, the very high rates of inflation that have followed and the response of monetary policy. I will also draw one particular contrast with the potential response to easier fiscal policy.

I'll kick off with the slightly less dramatic topic of national accounting identities. One of the first things you get taught in macro-economics is that national income is equal to national output: in principle GDP measures both these things, as well as aggregate demand. Accounting identities of this sort don't tell you anything about what causes what as they're true by definition (though it's useful to understand that we earn only what we produce and sell). But you might at least think, given the recovery in whole-economy output in the eighteen months since (Chart 1), that the worst of the drops in national income during the pandemic are well behind us.