Equities however have remained robust with some indices reaching  6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  record highs last week, a trend which the Bank’s Financial Policy Committee drew attention to in its July Financial Stability Report. In the UK, the GDP releases for March and April revealed notably stronger growth than we had expected in May, with monthly growth rates of 2.1% and 2.3%. At the time of our June meeting Bank staff had revised up their expectations for 2021 Q2 GDP growth to 5½% on the previous quarter, from 4¼% at the time of the May Report. That would be consistent with output in Q2 being less than 4% below its 2019 Q4 level. The monthly figure of 0.8% growth for May, released last Friday, contained some offsetting downside news. Within that however consumer-facing services continued to grow, with the drag coming from sectors like cars and construction where demand was constrained by supply shortages – a theme I will come back to. The UK labour market has also outperformed our May expectations, with unemployment falling to 4.7% and employment growing 0.3% in the three months to April. That continues a trend of downside surprises to our unemployment forecasts over the past year, even after allowing for the extensions to the furlough schemes. The falls in unemployment have however been accompanied by higher inactivity.
It is now conceivable that the pre-Covid peak in output in 2019Q4 will be restored in the course of the current quarter, and quite possible that unemployment could peak lower than our May MPR forecast. And inflation now looks likely to peak well above 3% and maybe nearer to 4% – the biggest news to our earlier inflation projections is yet to come. Reflecting all this I am somewhat less confident than I was that there remains a margin of spare capacity in the economy. Looking further ahead there are three key considerations which are shaping my assessment of the outlook and the risks around it:  1. Are developments temporary or more persistent? 2. Are they economy-wide or sectoral? 3. What they mean for the balance of supply and demand in the economy? As set out in the MPC’s June minutes, the Committee’s expectation was that “the direct impact of commodity prices on CPI inflation would be transitory”. Their central expectation was for “a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation would fall back”. I agree with that initial assessment – though it’s important to stress here that ‘transitory” does not mean ‘here today, gone tomorrow’. I learnt recently for instance that some businesses are bringing forwards their shipping arrangements for Christmas stock.