All this means that tradable output responds powerfully to the depreciation and, on the demand side, net trade and investment grow significantly. In reality, perhaps because there are significant frictions and uncertainties in the real world, the actual response of the tradable sector has been much more modest (even though the fall in the exchange rate has been bigger than 10%). 8  The impact of news about the future on the current economy is an area of active research for economists. See, for example, Beaudry and Portier (2006), Kurmann and Otrok (2013), and Kamber, Theodoridis and Thoenissen (2017). 9 The model used here is based on the model in Di Pace, King and Theodoridis (2017). 10 Broadbent (2017). 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  Chart 9a: Total factor productivity  Chart 9b: Real exchange rate  Chart 9c: Investment  Chart 9d: Hours worked  Chart 9e: Saving ratio  Chart 9f: Consumption  Chart 9g: Output  Chart 9h: Inflation  11  All speeches are available online at www.bankofengland.co.uk/speeches  11  But there’s also a significant difference in the predicted behaviour of consumption, this time in the opposite direction. Because they agree about the coming hit to income, households cut their spending immediately in this simulation – it falls 1½% in the year after the news comes through – and the saving rate goes up. This dominates the sizeable response of net trade and investment, such that aggregate demand and output also decline.
In terms of monetary policy, this is the sensitivity of inflation expectations to temporary or local factors which induces risks, rather than the fact that households’ inflation expectations exceed inflation measures. This is clear from the analysis of the reasons causing inflation deviation away from our October’s forecast. This deviation is quite notable — +0.7 percentage points. According to preliminary estimates, 0.2 percentage points of this deviation stem from a faster rise in sugar and sunflower 1/4  BIS central bankers' speeches  oil prices and 0.3 percentage points — from the growth of grain export prices and their passthrough to prices for both bakery products and a broader range of food products. The remaining 0.2 percentage points are interpreted as additional steady inflationary pressure. It may result from both a faster revival of demand in a number of industries already facing supply-side constraints and secondary effects brought about by increased inflation expectations. This is what may impact a steady level of inflationary pressure in the future as well. Therefore, today it is rather important how the situation will be unfolding in the future, including how inflation expectations will be changing and whether secondary effects may become more intense. This may result in a longer-lasting influence of one-off factors on prices. Moreover, we should take into account that a rise in inflation expectations may speed up the growth of the demand for consumer lending which has already been expanding materially amid the accommodative monetary policy.