The NIESR blog is a forum for Institute research staff to provide an informed, independent view on current economic issues and recent NIESR research. The views expressed here are those of the authors, and are not necessarily those of the Institute.
Lockdown ended on 19 July; the furlough will end on 30 September. The economy is set to reach its pre-pandemic activity level, but the Bank of England’s extreme monetary accommodation appears to go on forever. It is past time for the Bank to act to bolster its credibility and to act to avoid un-anchoring inflation expectations.
Our recently published Global Economic Outlook included an upward revision to our projections for global GDP growth this year and next. Across countries, however, there is considerable divergence in the projected dates at which they will recover their pre-pandemic GDP levels. Output has already recovered its level from before the pandemic struck in China and the US. But the US is the only one of the G7 economies to have achieved that so far.
CPI inflation rose by a large amount (1.2%) and is now at 3.2%. Part of this increase was due to the “base effect” of the 0.4% fall in inflation last year (July-August 2020) dropping out of annual inflation. The fall in July-August 2020 reflected the Eat out to Help out Scheme and the reduction in VAT for the hospitality sector. However, in addition to this was a very large element of new inflation, with prices rising by 0.7% between July and August.
Despite the headline CPI running at 5 1/2 percent in June and July, the 12-month trimmed mean PCE which excludes outliers is reported for June and July at 2 percent, and its monthly annualized rate fell from 3.1 percent in May to 2.4 percent in June, returning to 3.2 percent in July.
CPI inflation fell by a large amount (0.5%) and is now at 2.0%. All of this effect was due to the “base effect” of the spike in inflation last year (June-July 2020) dropping out. There was no new inflation in June-July 2021 as the general level of prices remained constant. The reduction in inflation was spread across most sectors, the only exception being Transport, which showed a large month on month increase, largely due to motor fuels and second- hand car prices. Clothing and footwear also showed a significant decrease due to the July sales.
Looking forward, when we allow for the reversal of VAT reductions in the hospitality sector and scheduled rise in household energy prices announced by OFGEM, we expect inflation to increase rapidly in the later months of 2021 reaching a peak of 3.9% or higher in the first quarter of 2022, falling to about 3% by July 2022.
The COVID-19 crisis has upended the lives of many, causing almost 200M global infections to date, over 4M deaths and untold damage to the livelihoods of millions. Although the recent vaccine rollout in some parts of the world offers some room for optimism, the epidemic is still far from defeated and many in the developing world are still at significant risk of infection.
The nature of the crisis, ostensibly one related to public health, has proved to be multi-pronged, with economic and social behaviour, public health policy and economic policy closely intertwined and both reacting to and conditioning the future path of the epidemic.
The Federal Reserve underpredicted 2021’s US inflation pick-up but believes the current inflation spike is temporary. If this assessment proves wrong, the result could be lasting higher than targeted inflation, an extended period of high unemployment, or both. To avoid this economic long Covid, the Fed should taper soon to give itself the flexibility to respond with higher rates if inflation fails to retreat as much as it expects.
Although the origins of national income accounting date back centuries, these concepts were taken up by the British government as a vital part of the war effort when the Central Statistical Office was founded in January 1941 directly from Winston Churchill’s command. The crisis of war drove innovation in the field of economic statistics, creating the need for accurate and useful economic statistics.
CPI inflation rose by a large amount (0.5%) for the third month running and is now at 2.5%. The contributions to inflation were spread across most types of expenditure, with Transport being the largest. The current high levels of monthly inflation are unlikely to be sustained and are due to recovery of some prices in the first lockdown and short-run adjustment and supply-chain issues. Inflation will continue to increase until it peaks in early 2022 and then comes down again. The peak may be above 3% but is unlikely to exceed 4%. The high level of inflation in the US is driven by very different factors to UK inflation and we do not expect UK inflation to “catch up” with the high levels of US inflation.
We have known since early this year that because of Covid-19 and lockdowns, public examinations would not go ahead this summer. So, the question is how can we design a mechanism to encourage accurate portrayal of pupil performance, when there may be an incentive to exaggerate?
CPI inflation rose by a large amount (0.6%) for the second month running and is now at 2.1%. The main drivers of the increase from April were Clothing and footwear and Recreation and Culture. Women’s clothing showed some very large increases. The current high levels of monthly inflation are unlikely to be sustained and are due to recovery of some prices from low levels in the first lockdown and short-run adjustment and supply-chain issues. Inflation will continue to increase until it peaks in early 2022 and then comes down again. The peak may be above 3% but is unlikely to exceed 4%. The high level of inflation in the US is driven by very different factors to UK inflation and we do not expect UK inflation to “catch up” with the high levels of US inflation
There is no doubt that Covid-19 has caused significant disruption to children’s lives and there is understandable concern about their educational progress. This has only been exacerbated by the recent outcry about the level of funding announced by the government to support their “catch-up” plans, which resulted in the resignation of Sir Kevan Collins. In addition, the current narrative around “catch-up” does not take account of children’s social and emotional needs as we move forward, focusing primarily on educational outcomes. Moreover, the Government “catch-up” plan is not clear about its long-term view. We don’t know what the ongoing impact might be, and children will need a prolonged period of additional support to avoid falling through the net.
The Bank of England is searching for a new Chief Economist, and the formal deadline for applications was Wednesday 2 June. But what is the Bank’s Chief Economist expected to do? And what skills and qualifications does he or she need? After all, the Bank has lots of economists. What special responsibilities does our central bank need a Chief Economist to carry out?
CPILW rose significantly to 1.5% in April from 0.8% in March. The official CPIH measure of inflation also rose significantly to 1.6% from 1.0% the previous month. The gap between the official measure and the measure using lockdown weights has remained small but positive. This contrasts with the months prior to December 2020, when CPIH was less than CPILW, indicating that the official measure tended to understate inflation in that period. Since December 2020 the two measures have moved closely together indicating that the official measure CPIH is robust to any expenditure shifts resulting from the Pandemic.
Renato Giacon; Principal Counsellor, EU Affairs, Policy and Partnerships Vice Presidency, at the European Bank for Reconstruction and Development
Corrado Macchiarelli; Research Manager for Global Macroeconomics at NIESR
This post was originally published on the LSE blog EUROPP - European Politics and Policy
The launch of a series of insight pieces by the National Institute of Economic and Social Research (NIESR) on the contours of a new fiscal framework for the United Kingdom has important implications for investment, productivity and sustained growth – not only for the UK but also for other countries. The economic recovery from the pandemic and the transition to a net-zero economy places a gigantic demand on sound fiscal policies around the world. In addition, the UK is also committed to levelling up disadvantaged regions while retaining and potentially strengthening its global competitiveness in the post-Brexit world.
Swapan Pradhan of the BIS and I begin by looking at bonds as an asset. The striking fact is that over the past 20 years there has been an explosion in global investor demand for bonds denominated in the main currencies – dollars, euros and sterling.
The impact of Covid-19 on the education sector is well documented. Schools experienced partial closures due to national lockdown for the first time in March 2020, with a second round of partial closures from January to March 2021. With schools now open to all pupils, the focus is on how to recover from this disruption. Unsurprisingly, the bulk of the narrative in the media and policy recommendations focuses on the impact of school closures on children, with talk of learning loss, and “catch-up” plans. Disappointingly, the impact on teachers and ways to support them moving forward has been far less prominent.
CPILW fell to 0.8% in March from 0.9% in February. The official CPIH measure of inflation rose significantly to 1% from 0.7% the previous month. The increase in inflation captured by CPIH may therefore be misleading, as it puts too large a weight on those sectors driving the increase.
The importance of evidence when making decisions about the implementation of services is now well understood. What Works organisations such as the Education Endowment Foundation and the Early Intervention Foundation place evidence at the heart of their work as a means of distinguishing between programmes that work and those that do not. This evidence base is important in ensuring that resources are used to support the implementation of programmes that will make a difference to the target group. This reliance on evidence is going to be vital in Covid-19 recovery plans, as programmes to support all those affected by the pandemic are put in place.