It could be argued – with the distinct benefit of hindsight, of course – that repeated supply shocks have combined to produce a persistent supply shock that has effectively reduced output below its pre-pandemic potential for much longer than first anticipated.6 When combined with the strong demand rebound – in part due to the pandemic policies that largely preserved household income – the conditions were set for the sort of persistent and broad-based inflation we are now experiencing.
Of course, the persistent, overlapping and unprecedented scale of the supply shocks were clearly not the sort of shocks we had in mind when we talked about the medium-term horizon in the strategy. Who, for example, would have predicted the pandemic or even a war in Europe in 2022?