The broadening of the recent product and labour shortages appears to be holding back activity and adding to the upward pressure on inflation. The risk is twofold. First, these shortages may prevent GDP from returning to its pre-pandemic peak until next year. After all, the rise in the share of manufacturers reporting labour shortages is consistent with manufacturing output falling by 5%. Second, they could mean that inflation jumps by more than the rise from 2.0% in July to 4.5% in November we already expect. We think most of the shortages will be temporary. That means inflation will probably fall back to 2.0% by late 2022 and the Bank of England may not raise interest rates until 2023. But if the shortages last longer, inflation may stay higher for longer and the Bank may pull the interest rate trigger next year.
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