For example, if the level of output in the UK economy were to return to pre-Covid levels in 2023, rather than 2022 in the MPC’s central case, this would lower inflation by around 60 basis points at the two-year horizon, leaving it comfortably below its 2% target. In summary, then, historically low rates of inflation driven by disinflationary demand and supply-side forces have been given further impetus by the Covid crisis. This provides reasonable grounds for believing  inflation, in the UK and globally, could remain low in the period ahead. Indeed, there are reasons to think there are significant downside risks to the inflation outlook, as the MPC’s fan charts illustrate clearly. 12 12  Evans et al (2015). 11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  A Higher Inflation Equilibrium Inflation-targeting requires a judgement on future inflation, not an extrapolation of the past. That is pertinent at present because there are several good reasons why future inflation trends may not match the past. The Covid shock is fundamentally different from the global financial crisis. And some of the forces acting on inflation in future, both cyclical and structural, may reverse direction. Let me discuss these factors in turn. (a) The Covid Crisis and the Output Gap The restrictions needed to contain the spread of Covid have had a profound impact on both demand and supply in the economy.
17  18  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  18  Chart 15: Global Dependency Ratios  160 140 120 100 80 60 40 20 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060  0  World Middle-income countries  High-income countries Low-income countries  Source: United Nations, Department of Economic and Social Affairs, Population Division Note: Dependency ratio is population aged 0-19 or 65+ per 100 aged 20-64  A second supply-side effect working in the same direction is globalisation. The world witnessed many decades of under-interrupted growth in world trade and global value chains after the Second World War, much of it associated with the rising role of China in the world economy. 19 On average since 1983, global trade volumes have risen by around 5½ % per year, roughly double the rate of growth of the world economy. The Covid crisis has decisively broken those trends. Global trade volumes collapsed by around 15% at the peak of the Covid crisis, compared to a fall in global activity of around 9% (Chart 16). The crisis saw the fracturing of some global value chains, in part as a result of countries prioritising domestic over international supply of some goods and services.