And even if this mechanism has been at work, it’s not clear it has important implications for inflationary pressure over the medium term, which is the focus for monetary policy. It’s reasonable to expect the degree of dispersion  Sources: ONS and Bank calculations. in demand and spare capacity to narrow as and when aggregate spending recovers (those areas most affected by the pandemic are likely to see stronger growth afterwards). To the extent shifts in consumption do persist – some have speculated, for example, that a higher proportion of people will work from home in future, with possible implications for the pattern of spending over the longer term – one would expect the economy to adapt to those over time. But alongside other possibilities that the MPC described in the August Monetary Policy Report, the significant dispersion in demand might be one other thing that’s effectively served to flatten the price Phillips curve (i.e. to temper the response of inflation to shifts in aggregate spending), if only in the shorter term10. Conclusion  The pandemic, and the waves of the restrictions that have accompanied it, have had highly selective effects. They’ve hit some areas of spending much harder than others. The decline in aggregate consumer spending would almost certainly have been more protracted and more widespread – affecting not just activities that involve infection risk but those that do not – but for the furlough schemes. These have helped shield household incomes from the big drop in national income last year.
I strongly believe that a better understanding of the rationale behind the changes in our forecasts is very important for communicating our policy as well as for the viability of the principles of transparency and accountability; therefore, I would like to explain these factors in detail. Better-than-expected outcomes regarding unprocessed food prices urged us to revise our assumption for food inflation downwards. Accordingly, while we decreased our food inflation assumption for end-2010 from 9 percent to 7.5 percent, we maintained our assumptions for food inflation for 2011 and 2012 at 7 percent (Table 3). The change in question had a 0.4 percentage point downside impact on end-2010 inflation. BIS Review 133/2010  13  With the increased downside risks regarding global economic activity, oil prices in the second quarter were below the levels assumed in the April Inflation Report (Figure 32). In this context, while we revised our assumptions for crude oil prices for 2010 and 2011 downwards, oil price assumptions for 2012 were maintained at USD 90 (Table 3). This revision shifted the 2010 inflation forecast down by 0.2 percentage points. Core goods and services inflation, which we believe to reflect the main trend of inflation, declined more than we had anticipated. This decline led to a 0.2 percentage point fall in our year-end inflation forecast. The contribution of aggregate demand conditions to disinflation in the revised forecast is slightly higher than envisaged in the previous Report due to the weaker external demand Outlook.