It is now conceivable that the pre-Covid peak in output in 2019Q4 will be restored in the course of the current quarter, and quite possible that unemployment could peak lower than our May MPR forecast. And inflation now looks likely to peak well above 3% and maybe nearer to 4% – the biggest news to our earlier inflation projections is yet to come. Reflecting all this I am somewhat less confident than I was that there remains a margin of spare capacity in the economy. Looking further ahead there are three key considerations which are shaping my assessment of the outlook and the risks around it:  1. Are developments temporary or more persistent? 2. Are they economy-wide or sectoral? 3. What they mean for the balance of supply and demand in the economy? As set out in the MPC’s June minutes, the Committee’s expectation was that “the direct impact of commodity prices on CPI inflation would be transitory”. Their central expectation was for “a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation would fall back”. I agree with that initial assessment – though it’s important to stress here that ‘transitory” does not mean ‘here today, gone tomorrow’. I learnt recently for instance that some businesses are bringing forwards their shipping arrangements for Christmas stock.
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.