Omicron may weaken activity but lift price pressures

While the emergence of the Omicron COVID-19 variant has increased the downside risks to our GDP forecasts, it has arguably increased the upside risks to our CPI inflation forecasts. The transmissibility, severity and capacity for Omicron to escape vaccines are still unknown. But if Omicron leads the government to close non-essential retail, hospitality venues and schools, we think GDP would fall by something like 3%. As has been in the case in previous lockdowns, that would boost demand for goods relative to demand for services, which may keep goods inflation higher for longer. And as long as the Chancellor revived the furlough scheme, any easing in wage pressures may only be temporary. That suggests the Bank of England will still raise interest rates from 0.10%, although it has become even more uncertain whether lift-off will happen at the policy meeting on 16^th December or early next year.