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.
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 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%.
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?
