It’s also because, at least in the short run, costs are “convex” (Chart 3): the rise in costs and prices in areas where there’s strong demand are larger than the equivalent declines in sectors where demand is weak. Chart 3: Convexity means greater dispersion in demand increases average costs  Saunders (2021) “The inflation outlook” speech given during an online webinar and Haskel (2021) “Will the pandemic “scar” the economy?” speech given in online webinar at the University of Liverpool Management School. 3  4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  Perhaps unsurprisingly, in response to what is a global pandemic, we’ve seen similar shifts elsewhere. Across the OECD as a whole, consumption of services in the first quarter of this year was still well below pre-pandemic levels, but spending on goods – durables in particular – was significantly higher (Chart 4). Compounded by specific hits to supply in some areas these have contributed to large rises in the price of many traded goods – not just oil, but other basic commodities and some intermediate manufactures, such as computer chips, as well. Indeed in several cases it’s not even been possible to get hold of such things, except after a long delay. These “bottlenecks” are what you’d expect to see if you had a more angular, “L-shaped” version of the smooth cost curve in Chart 3 (Chart 5).
Many other tradable goods have to go through several steps before reaching the final consumer and pass-through of their price changes is probably more gradual. Based on past experience – notably the big falls in the value  In the latest monthly data services inflation was (just) higher than 2%. But there’s a case for measuring these “contributions” relative to past averages, to take account of trends in relative prices. On that basis, because services inflation is well below average, more than all the overshoot in aggregate inflation can be attributed to the goods side. In general, one should be careful in using these “contributions”, or at least make sure not to treat all else as equal. Over the medium-to-longer term, inflation is determined by monetary policy (and the credibility in the regime) not by individual components of the CPI, with relative prices determined by real forces (e.g. the relative demand for goods and services). So over time, assuming the inflation target is on average met, the true “contribution” of a rise in one particular component is likely to be zero – the counterpart is simply weaker inflation in other prices. 15  20  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  20  of sterling in 2009 and 2016 – rises in import prices driven by exchange-rate depreciations seem to take longer – perhaps up to 2-3 years – fully to feed through.