The economy has proved remarkably resilient to the effects of Covid, and the impact on the supply side has so far been smaller than we might have feared at the aggregate level. That partly reflects, however, the fact that most of the government support schemes for businesses, in particular the furlough scheme, remain in place. As those schemes come to an end it is likely that at least some businesses turn out no longer to be viable, and there is a risk of more substantial impacts. If the effect is unbalanced across sectors then there may also be more substantial labour market hysteresis than assumed in our central May forecast. In addition to any Covid effect, the long run effects of Brexit on the supply side of the economy, in particular on productivity, are largely yet to come through;  One additional supply uncertainty that has emerged has been the question of whether temporarily inactive workers will resume their search for jobs – if inactivity remains at a persistently higher level that would reduce the supply of labour and could contribute to wage pressures. Again it is likely that we will not know the answer to this for some time. But it is the balance of demand and supply that will ultimately determine the medium term inflation impact – my third consideration. Inflation expectations  One final risk that I will be monitoring closely is the risk that the expected transitory increase in inflation and wages generates expectations of a more sustained rise in inflation.
Other policy makers have faced similar challenges, and have found highly innovative and effective ways to overcome them, such as the Treasury’s furlough scheme. And of course the intellectual challenges faced by economic policy makers have been tiny compared with the very substantial challenges faced by the healthcare and other key workers who have had to tackle the Covid pandemic itself, as well as those who have suffered from the disease. My previous Strand Group lecture, “The First 50 years of the Government Economic Service”, touched on some of that earlier experience. 2 My MPC colleague Silvana Tenreyro made a similar observation in her 2018 speech on models in macroeconomics. 3 Or to give the quote from Korzybski (1933) more fully: “A map is not the territory it represents, but, if correct, it has a similar structure to the territory, which accounts for its usefulness”. 4 It’s not for nothing that the Bank of England’s central forecasting model is known as COMPASS. 1  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  Figure 1: The MPC’s approach to its forecasts has evolved during the pandemic  3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  An evolving approach to the outlook  The MPC, supported by the efforts of Bank of England staff, has continued to make use of forecasts throughout the Covid period.