The consequences of the pandemic for inflation

The surprise rise in CPI inflation in July highlights that the effects of the pandemic will not only be deflationary. The hit to supply from the pandemic combined with shifting spending patterns may push up inflation in some areas. Ultimately, though, there is still a large margin of slack in the economy and unemployment will surge when the furlough scheme ends. The resulting hit to the buoyancy of the job market, household incomes and demand will be the predominant driver of inflation over the next two years, keeping it below the 2% target and forcing the Bank of England to expand its QE program further.