The same is true if a rise in infection rates is expected to be permanent. If the future looks exactly like the present there’s no reason for saving – or therefore total consumption – to change. These conditions are obviously unrealistic. Some things are good substitutes for risky activities during the pandemic. Perhaps it’s not much harder to buy things online than in a shop. At a stretch, watching a film on a screen at home can replace a trip to the cinema. But going out with family or friends to a pub or a restaurant, listening to live music or watching a play – for many of the things we’ve been denied for much of the past year, there is no good proxy. As for the dynamics of the pandemic, one thing they’re not is permanent or even slow-moving. Infection rates went up very rapidly in the spring and, once lockdown was in place, they fell almost as rapidly in the early summer. With the promise of looser restrictions as that happened, it would make sense for people to hold off on some spending until the day itself arrived. Nevertheless, it’s clear that a fair degree of expenditure switching took place: some areas of consumption fared unusually well last year, even as others declined extremely sharply. Because it’s hard for economic resources to respond to large and rapid shifts in demand this may have softened somewhat the immediate impact of the downturn, enormous as it was, on inflation.
Guerrieri, V., Lorenzoni, G., Straub, L. and Werning, I, 2020. ‘Macroeconomic implications of COVID-19: can negative supply shocks cause demand shortages?’. NBER working paper No. 26918. Krueger, D., Uhlig, H. and Xie, T., 2020. ‘Macroeconomic dynamics and reallocation in an epidemic: evaluating the “Swedish solution”’, NBER Working Paper No. 27047. Osotimehin, S., 2019. ‘Aggregate productivity and the allocation of resources over the business cycle’, Review of Economic Dynamics, Vol. 32, pp. 180-205. Samuelson, P. A. and Swamy, S., 1974. ‘Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis’. The American Economic Review, Vol. 64, pp. 566-593. Vlieghe, G., 2020. ‘Assessing the health of the economy’. Speech available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/assessing-the-health-of-the-economyspeech-by-gertjan-vlieghe.pdf. 17  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  17