Given the nature of the shock and the restrictions, it is unclear in principle whether we would expect the hit to demand to be greater than to supply. In other words, the implications of the Covid shock for the output gap, and hence inflation, are unclear as a matter of theory. It is clear restrictions forced large number of businesses to close and large numbers of workers to be furloughed, constricting supply in the economy. The crisis clearly also had a large adverse impact on the demand for certain goods and services – for example, social spending due to health concerns and travel spending due to working from home. The net effect of these large forces of supply and demand on slack in the economy is an empirical judgement. Empirically, the unemployment rate typically provides the cleanest guide to slack in the economy. Unfortunately, that is not the case at present. Statistical surveys of employment are less reliable than usual. Official measures of unemployment from the UK Labour Force Survey (LFS) show a fall in employment of around 500,000 over the past year, giving an unemployment rate of around 5.1%. But administrative data from HMRC suggest job losses 1½ times that, implying an unemployment rate of over 6%. A further complicating factor is the various government support schemes. By design, these have broken the link between the demand for workers by firms and the unemployment rate.
259-264. Goodhart, C and Pradhan, M (2020), ‘The Great Demographic Reversal: ageing societies, waning inequalities and an inflation revival’, published by Palgrave Macmillan; 1st ed. 2020. Haldane, A (2018) ‘Pay power’, Speech given at ACAS Future of Work Conference, available here. Johnson, R (2018) ‘Measuring global value chains’ American Review of Economics, 10:207-36. Malmendier, U, and Nagel, S (2011), “Depression Babies: Do Macroeconomic Experiences Affect RiskTaking?” Quarterly Journal of Economics, February 2011, vol. 126(1), pp. 373-416. O’Connor, M and Portes, J (2021) ‘Estimating the UK population during the pandemic’, available here. Orphanides, A and Williams, J (2007) ‘Robust monetary policy with imperfect knowledge’, Journal of Monetary Economics, Vol. 54, Issue 5. Tenreyro, S (2020) ‘Monetary policy during pandemics: inflation before, during and after Covid-19’, Speech available here. Von Hayek, FA (1972) ‘A tiger by the tail: the Keynesian legacy of inflation’ published jointly by the Institute of Economic Affairs and the von Mises Institute. 24  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  24