5  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  5  Chart 4: Underlying UK inflation relative to target-consistent levels  pp  2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 -2.5  2012  2013  2014  2015  CPI ex VAT Trimmed mean core  2016  2017  2018  Core services CPI ex VAT SPPI  2019  2020  2021  Core CPI ex VAT  Source: ONS and Bank calculations  Chart 5: UK inflation expectations  Source: Bank of England, HMT Survey of Professional Forecasters and Citi/YouGov Household Expectations Survey  6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  On the demand side, a disinflationary drag factor over the past decade has been the persisting effects of the global financial crisis. The recovery from this crisis was significantly slower than expected, with the level of activity in the UK consistently undershooting expectations (Chart 6). This resulted in a larger and more persistent output gap, and hence a larger and longer downdraught on inflation, from the demand side of the economy than was anticipated. The same was true internationally. Chart 6: UK GDP growth and historic forecasts  per cent  6 4 2 0 -2 -4 -6 -8  2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: ONS and Bank of England.
While affecting both demand and supply, most economists believe the hit to demand from Covid has been larger than to supply, opening up output gaps. The IMF estimate the output gap among the G7 countries rose from around -0.4% in 2019 to 3.8% in 2020. In the UK, the MPC judge that the output gap has widened and will continue to widen in the near term, peaking at 3% and lowering inflation by around ½% in 2021. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  Chart 10: Velocity of Broad Money  Nominal 0.3 GDP/Broad money  0.25 0.2 0.15 0.1 0.05 0 06  07  08  09  10  11  12  13  14  15  16  17  18  19  20  Source: ONS and Bank of England. There are contrasting views among economists about the pace at which these output gaps will close. The MPC’s central view is that the UK’s output gap will close this year, although uncertainty around the timing and pace is considerable. A key factor, as after the global financial crisis and the Great Depression, will be the extent and persistence of psychological scarring among lenders, households and companies. The deeper and longer-lasting these psychological scars, the slower the likely pace of recovery, the more persistent the output gap and the greater the disinflationary drag from the Covid crisis.