Lags, trade-offs and the challenges facing monetary policy
Speech given by
Ben Broadbent, Deputy Governor, Monetary Policy
Leeds University Business School
6 December 2021
I've received helpful comments I'd like to thank
from colleagues at the Bank of England.
Fabrizio Cadamagnani for his help in preparing the speech. The views expressed are my own and do
not necessarily reflect those of the Bank of England or other members of the Financial Policy
Committee or the Monetary Policy Committee.
1
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It's a great pleasure to do so in person,
Good morning! Thank you for asking me to speak to you today.
something I haven't been able to do for almost two years. -
Virtual meetings are all very well and were
- but I think there's something missing if that's the
clearly indispensable during the worst of the pandemic
It's an additional pleasure to be in Leeds.
only way in which we ever talk to each other. As you may know,
year we'd be setting
as part of a plan to increase our staff presence across the UK we announced earlier this
up a new hub right here in Leeds.
I'm coming here at an extraordinary time for the economy in general and for monetary policy in particular.
Annual CPI inflation rose to over 4% in October, with the jump in domestic energy bills the single most
important contributor to the change on the month. The aggregate rate of inflation is likely to rise further over
the next few months and the chances are that it will comfortably exceed 5% when the Ofgem cap on retail
energy prices is next adjusted, in April. The cap is based on a trailing average of forward prices in wholesale
energy markets. The relevant period for next April is between August this year and February 2022.
Two-thirds of the way through we can already be reasonably certain (unfortunately) of a further significant
rise in retail energy prices next spring (Chart 1).
Chart 1. Gas bills likely to rise significantly Chart 2. Goods prices account fully for the
again next April current overshoot in inflation relative to target
Percentage points
140
Average bill, Wholesale cost
5
900
£ per year (p/therm)
120
4
800
CPI inflation Services
(43%)
(per cent)
100
Other goods
3
700
(39%)
Gas bill
80
(LHS) 2
600
60
1
Wholesale gas
costs relevant for
500
40
0
each Ofgem cap
Food and non-alcoholic
period (RHS)
400
beverages (11%)
20
-1
Fuels and
Electricity and gas (3%) lubricants (3%)
300 0
-2
2019 2020 2021 2022 2023 2024
2016 2017 2018 2019 2020 2021 2022
The Ofgem cap is adjusted twice a year. The figure set in month Contributions to annual CPI inflation. Figures in parentheses are
t, and for the following six months (t till (t+5) inclusive), is based basket weights in 2021 and do not sum to 100 due to rounding.
-
on the forward price for the following year (t (t+11)) observed The chart was shown in the November MPR and does not include
between three and nine months earlier. The dotted line indicates the latest data, for October 2021.
prices relevant for the cap based on current futures contracts. Sources: Bloomberg Finance L.P., Department for Business,
Sources: Ofgem, Bloomberg Finance L.P. and Bank calculations. Energy and Industrial Strategy, ONS and Bank calculations.
It's broader than that.
It would be wrong to say this inflation is only about energy. What we can say,
- -
however, is that most of it thus far, at least has been concentrated in tradable goods in general
(non-energy as well as energy), much less of it in the non-traded parts of the economy. One indication of
that is Chart 2, which plots the arithmetic contribution of various broad components to the change in the
aggregate CPI in the UK. Just about the entire overshoot in overall inflation, relative to the MPC's 2% target,
Though it's also been rising, price
reflects unusually rapid inflation in prices of (largely tradable) goods.
2
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inflation for (largely non-tradable) consumer services is currently close to its average during the inflation
targeting period.
Another indication is that we've seen similar surges in inflation in many other developed economies as well
striking is that this has happened even though global
(Chart 3). This is a global phenomenon. And what's
-
(UK-weighted) economic activity has only just returned and in several individual countries has yet to return
- -
to pre-pandemic levels (Chart 4). In the UK, in the third quarter of the year, output in the private sector
-
the part of the economy that actually sets prices was still 2% lower than it had been at the end of 2019.
More often than not higher inflation is associated with stronger, not weaker, economic activity. At least if you
consider the last eighteen months or so as a whole, taking account not just of the resurgence this year but
the huge contractions in 2020, that's not what's happened on this occasion.
Chart 3. Inflation has risen significantly in many Chart 4. ...even though advanced-economy
countries... output is barely higher than a couple of years ago
Per cent 4
Level relative to 2019 Q4, per cent
UK Euro area US
6
0
5
-4
4
3
-8
2
-12
1
UK GDP (output estimate)
-16
0
UK market sector output
-1
World GDP
-20
-2
-24
-3
2016 2017 2018 2019 2020 2021
97 99 01 03 05 07 09 11 13 15 17 19 21
Twelve-month CPI inflation. Includes November flash estimate of World GDP is constructed using GDP data of 188 countries
Euro Area inflation. weighted according to their shares in UK exports. UK market
Sources: Eurostat, ONS, Refinitiv Eikon from LSEG, US Bureau sector output is real market sector gross value added.
of Economic Analysis and Bank calculations. Sources: IMF World Economic Outlook (WEO), ONS, Refinitiv
Eikon from LSEG and Bank calculations.
- -
This pattern levels of output that are still relatively subdued but rapid and skewed price rises has been
evident for some time. Qualitatively, at least, nor has there been any change in the best explanation we
have for it. Inflation in global goods prices looks to be the result of a big shift in global consumer demand,
induced by the pandemic, away from services and towards goods. Even at the best of times it would have
been hard for the supply sides of our economies to adapt to this. With the pandemic also affecting global
it's proved that much
supply chains for goods harder1.
There are still good reasons to think that this rapid inflation in tradable goods prices is likely to fade, and in
some cases reverse, before a policy decision taken now could do much to offset it. In contrast, and although
1
Many individual policy makers have discussed these points (I did so in a couple of speeches earlier this year - "Covid and the
in and then in July). As the MPC we've done so in successive
Composition of Spending" January, "Mismatch" Monetary Policy Reports
the 'in focus' section in the
this year (see, in particular, August Report).
3
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it's so far contributed much less, the tightening of the domestic labour market is
likely to be a more persistent
That's why the MPC has paid close attention to it, and in particular how it's behaving now
source of inflation.
that the furlough scheme has ended.
As I say, I'll have a little more to say about these things -
whether rapid goods inflation is likely to prove
by that word, and what we've learned about the
transitory, what people have actually meant post-furlough
-
labour market in a bit.
Sandwiched around those points, both at the end and now, are a couple of more general points about
These too are familiar but they're particularly relevant in the current environment and are
monetary policy.
therefore worth reiterating.
One is that it takes time for policy to work. A change in interest rates has its peak impact on inflation only
-
after a significant delay probably eighteen months or more2. One implication is that, fully to offset the
inflation we've seen through the course of this year,
monetary authorities would have to have foreseen the
various things that have pushed it up (including, for example, the recent problems with gas supplies).
-
Another is that they would have to have tightened policy pretty aggressively by enough to push up
-
unemployment materially, with the explicit aim of depressing nominal wage growth just ahead of or during
Using the Bank's economic model, and assuming perfect foresight of the rise
the first wave of the pandemic.
in tradable goods prices, a simulation suggests you would have needed comfortably more than an extra 2%
- -
points on the rate of unemployment something around eight hundred thousand jobs to have kept overall
CPI inflation at 2% in the fourth quarter of this year (Charts 5a and 5b).
...would have
Chart 5a. Tighter monetary policy to achieve 2% Chart 5b. resulted in much higher
inflation now...
unemployment
Per cent 5.0 Per cent 7.0
6.5
4.0
6.0
3.0
5.5
2.0
5.0
1.0
4.5
-
4.0
-1.0 3.5
2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024
Inflation - N21 MPR Inflation - Scenario Unemp. - N21 MPR Unemp. - Scenario
CPI inflation excluding VAT. Sources: ONS and Bank calculations. Sources: ONS and Bank calculations.
2
In the literature estimates of the policy lag seem to vary quite a bit. In Cloyne and Hurtgen (2016, 'The macroeconomic effects of
American Economic Journal:
monetary policy: a new measure for the United Kingdom', Macroeconomics), the authors find that the peak
effect of changes in UK monetary policy takes well over two years to come through. Cesa-Bianchi, Thwaites and Vicondoa (2020,
'Monetary policy transmission in the United Kingdom: a high frequency identification approach', European Economic Review) provide
evidence of material effects after barely a year.
4
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there would've been no way to control
In other words, inflation in prices but, at the same time, leave nominal
It's sometimes been suggested that, had monetary
wages and nominal household incomes untouched.
policy acted to suppress it, consumers might have been protected from this rise in the cost of living.
Unfortunately, that's not true.
At a fundamental level this is because monetary policy cannot, over the long
-
run, offset real economic shocks. If structural productivity grows more slowly, for example as it did after
-
the financial crisis then, ultimately, real wages will do so as well, no matter what happens to monetary
policy. And if strong worldwide demand and impaired global supply chains raise the price of a good we buy
on global markets, as we've seen over the past year, there's no avoiding
the consequences of that for real
incomes either. One way or the other, either via lower nominal pay or higher prices, real incomes will be
lower than they otherwise would have been. Indeed, because suppressing nominal wages itself involves a
- -
real cost unemployment would need to rise real incomes would be that much lower in the first case than
in the second (i.e. in the simulation depicted in Charts 5a and 5b than they actually have been this year).
- -
What policy can do assuming these shocks are foreseeable, or persist for long enough is to make a
choice between these outcomes. Again supposing all this had been predictable in advance, in the spring of
2020, the policy maker in this simulations might have chosen not to tighten policy quite so aggressively, and
to tolerate a degree of above-target inflation at the end of this year, in order to avoid such a steep rise in
unemployment.
But this obviously involves a trade-off. In the face of big increases in import prices of this sort, either you
stick rigidly to the primary inflation objective, and suffer the greater hit to real incomes and domestic output;
or you accommodate somewhat higher inflation and pay some attention to the secondary goal of stabilising
"exceptional the MPC's remit requires explicitly that
the domestic economy. In these circumstances"
Committee balance these considerations and, if necessary, that it set policy with a view to taking somewhat
For these considerations to matter, clearly, these
longer to return inflation to target3. "trade-off-inducing"
shocks should be sufficiently persistent, or sufficiently foreseeable, to affect inflation further into the future
than the usual policy lags.
I'll return
to these points in the conclusion. Before then I want to look at the latest evidence on traded goods
- word "transitory"
prices trying to define a little more precisely what how should be understood in this
-
context and then the domestic labour market.
3
"In exceptional circumstances, shocks to the economy may be particularly large or the effects of shocks may persist over an extended
period, or both. In such circumstances, the MPC is likely to be faced with more significant trade-offs between the speed with which it
aims to bring inflation back to the target and the consideration that should be placed on the variability of output. In forming and
communicating its judgements the Committee should promote understanding of the trade-offs inherent in setting monetary policy to
inflation target while giving due consideration to output volatility".
meet a forward-looking
5
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Will inflation in traded goods prices prove "transitory" (and what
have people meant by the
word anyway)?
between "global" and "domestic" sources of inflation is
I should say up front that the split not, strictly
And I don't
speaking, an entirely clean one4. really buy the argument one sometimes hears that monetary
policy can't do anything about the first - "imported" inflation, as it's sometimes called - because it's
purely
-
unable directly to affect the source of it. As the MPC cannot affect the global supply of oil, for example this
- then it can't do anything about an inflation caused by rising oil prices, even if
is how the argument goes
that were to continue for a long time.
That's true, of course. But it's
also true of just about everything that might otherwise affect inflation, including
As long as you've got a
the many domestic influences. Policy has no direct control over those, either.
floating exchange rate there's nothing about being an open economy
(and therefore subject to swings in
import prices) that prevents monetary policy from controlling overall inflation, at least over the medium term.
Chart 6. Goods price inflation tends to be more
What being an open economy might mean, in the
volatile and less persistent than services inflation
shorter run, is that inflation is more volatile.
That's because prices of traded goods tend to be
And it's here that the
more volatile (Chart 6).
distinction is more significant.
Take oil prices as an example. These move
around a lot more than those of non-traded goods
and services and often have a significant and
fairly immediate impact on the CPI. But that
impact also tends to dissipate relatively quickly,
And it's for this reason, not
after a year or so.
Volatility measured as standard deviation over the sample (annual
rates can't affect the
because a change in interest
data 2001-21). Persistence measured as the lagged coefficient of a
first-order auto-regressive model.
supply of oil (obviously), that the orthodox
Sources: ONS and Bank calculations.
response of monetary policy to a change in oil
prices is in the first instance to look through it. By the time policy could really do anything to offset such a
rise, allowing for the delay between action and effect, the direct impact on inflation would largely have
disappeared.
It's in this context
that, referring to the current surge in tradable goods prices, several policy makers have
"transitory".
used the word By that they do not mean (and never meant) that these effects will be gone in
one, two or even twelve months. As we saw at the start, thanks to the protracted way in which developments
in wholesale markets feed through to the Ofgem cap, the recent jump in wholesale gas prices will directly
4
My predecessor Charlie Bean explained this point very clearly in a talk in Jackson Hole in 2006.
6
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boost CPI inflation in the UK for twelve months. The relevant question is whether the global factors currently
pushing up on goods prices are still there by the time a policy decision taken today could have any
significant effect of its own. What is their prospective contribution to inflation in eighteen, twenty-four months
"transitory" should be
and beyond? This is the horizon that matters for policy and against which the word
measured.
Chart 7. Switch from services to goods has been
As I outlined earlier, one key contributor to the big
a global phenomenon. Services consumption
acceleration in traded goods prices has been the started recovering with the lifting of restrictions
Level, 2019Q4 = 100
big shift in consumer spending, across the
Durable Goods 125
developed world, away from services and towards
120
Other goods
goods. Unable to spend anything like as much on
115
Services
-
consumer services during the pandemic
110
-
restaurants, leisure and transport, for example
105
consumers didn't save all the proceeds;
they
100
shifted quite a bit of them to goods. This was
95
already evident as early as the start of this year. In
90
the UK, for example, retail sales grew pretty 85
strongly through 2020, even as spending on 80
Dec 19 Jun 20 Dec 20 Jun 21
you can't go to the cinema,
services collapsed (if
Sources: OECD Quarterly National Accounts, IMF World
why not spend those savings on a new TV?).
Economic Outlook and Bank calculations.
Across the advanced economies in aggregate,
spending on services in first quarter of the year was 5% lower than at the end of 2019; spending on goods
was 5% higher (Chart 7).
shift in response, they needn't have any
Shifts in demand happen all the time and, as long as supply can
impact at the macro-economic level. But this one was far larger, more widespread and occurred much faster
than most. And, far from shifting in response, and meeting that extra demand, the pandemic meant the
global supply of goods was actively impaired. Local lockdowns affected production in many Asian countries
and effective capacity in shipping and other forms of transport was also hit.
Earlier this year my own guess was that these things would visibly start to reverse by the end of it. Because
they were caused by the pandemic it was reasonable to expect the shifts in demand to reverse, and the
problems in supply chains to abate, as vaccinations took effect.
As yet it's clear that hasn't
happened to the degree that I, at least, expected. Shipping costs remained very
as we've seen, energy (and particularly gas) prices took a huge lurch upwards;
high throughout the autumn;
at the retail level there is no sign yet of any deceleration in goods prices.
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In the case of energy markets there are probably specific factors to blame. A prolonged period of cold
weather last winter had reduced inventories of gas in Europe. Interruptions to the supply of renewables
further increased the demand for gas, as did efforts to shift away from coal in Asia. And there have been
supply problems too in Norway and Russia.
More generally, there are several possible reasons why these trends have continued, despite the worldwide
easing of Covid restrictions.
The substantial fiscal easing in the United States gave a renewed and significant impetus to spending on
- -
consumer durables, both in that country and therefore the world as a whole. In some cases notably cars
supply problems meant this demand couldn't be met.
But US spending on other durables nonetheless rose
significantly further between the first and second quarters of this year, as fiscal transfers started to come
through, and in 2021Q2 was almost 30% higher than immediately before the pandemic (Charts 8 and 9).
Chart 8. US accounts for much of the growth in Chart 9. Large increase in durables consumption
global demand for durable goods in the US, now partly easing back
Level, end 2019 = 100
Percentage points 24
US
Consumer durables
140
20
Other G7 excl. new autos
130
16
Total G7 (%) New autos
120
12
110
8
100
4
90
0
80
-4
70
60
-8
50
-12
Apr 19 Oct 19 Apr 20 Oct 20 Apr 21 Oct 21
Dec 19 Jun 20 Dec 20 Jun 21
Contributions to percentage change on 2019 Q4. Sources: Refinitiv Eikon from LSEG, US Bureau of Economic
Sources: OECD Quarterly National Accounts, Refinitiv Eikon from Analysis and Bank calculations.
LSEG and Bank calculations.
In addition, and even if the pandemic itself has receded, some of the shifts in spending it produced have
proved more enduring. Working from home is still much more prevalent than before the crisis, reducing
spending on travel and some other local services as well. For the same reason some of the geographical
- -
shifts away from city centres and towards the suburbs and countryside have also lasted longer.
Third, policies in some Asian countries have meant that, even though vaccination
"zero-covid" rates have
risen significantly, restrictions continue to be imposed in response to local outbreaks of the virus5. Coupled
with the continuing strength in demand, these have contributed to significant congestion on shipping routes,
5
There were two major port closures in the summer in China, after some workers tested positive. Outbreaks in Vietnam, an important
producer of consumer durables for the US market, led to a significant tightening of restrictions throughout the summer. These were
ended in early October, but have had knock-on effects on delivery times and shipping demand since then.
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particularly those from East Asia to Europe and North America. For example, despite new shipping capacity
coming on stream, door-to-door delivery times on the China-US route have continued to lengthen through
the autumn (Chart 10).
However, I still think it's more likely than not - -
looking a couple of years ahead as we should that these
pressures on traded goods prices are more likely to subside than intensify.
Through the autumn there have been signs that some countries in the pacific region are abandoning
policies, or at least
"zero-covid" pursuing them less stringently6. (Obviously the new Omicron variant might
interrupt that process, depending on the effectiveness of existing vaccines against it and the severity of its
Those we don't yet know.)
health effects.
The easing in US fiscal policy is past its peak and the impetus it's provided to US durables demand
has
therefore started to decline. There is probably still significant pent-up demand for cars and, as and when
constraints on auto production are overcome, we can expect that spending to pick up again. But as far as
other durables are concerned, the pace of new buying has meant that the stock of them, relative to income,
has been rising and is now significantly above average. This suggests that the current pace is unlikely to be
maintained indefinitely (there are only so many cars and cookers you need).
Chart 10. Shipping congestion has intensified in Chart 11. In the UK, recovery of consumer-facing
recent months though cost down a bit services output suggests demand is rotating
back, but some sectors lag behind
Dollars (thousands) Per cent change on 2019Q4
Days 20
80
20 10
Average number of days (lhs)
75
18
Average freight rate (rhs)
0-10
16
70
-20
14
65
-30
12
-40
60
10
-50
8
55
-60
6
-70
50
Retail goods
4
-80
Hotels and restaurants
45
2
-90
Travel
40 - -100
Nov 18 Nov 19 Nov 20 Nov 21 Jan 20 Jun 20 Nov 20 Apr 21 Sep 21
'Retail goods' series is retail sales in volumes.
Average number of days: end-to-end (factory to warehouse) The other series
shipments between China and the US. Average freight rate: are output measures.
shipments from China/East Asia to North America West Coast. Sources: ONS and Bank calculations.
Sources: Freightos.com and Freightos Baltic Index.
At a deeper level there are also some signs of a rotation away from goods demand and back towards
services. Non-auto durables spending in the US has fallen back a little in the second half of this year. And
although trends in the UK are less important in this respect (our share of global goods demand is small), you
6
See
"Asian countries are at last abandoning zero-covid strategies", The Economist Oct 9th 2021 edition.
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can see from Chart 11 that retail spending here has also declined since the spring. I mentioned a moment
ago that some of the shifts in spending caused by the pandemic had persisted, even as pandemic itself
receded. You can also see in Chart 11 that spending on transport is still a long way short of pre-pandemic
levels, not least because many of us are still working from home (to some extent, at least). But total
spending on services has nonetheless outgrown that on goods in the second half of this year.
Chart 12. Shipping costs have fallen in recent
Finally, and more generally, we know that, in many
months and forward contracts suggest further
instances, tradable goods prices exhibit a significant material declines
Jan 2017 = 100
degree of mean reversion. More often than not, big
400
rises are followed not just by slower growth but Latest
350
Where they exist, that's
outright declines. 2017-19 Average
300
consistent with the current pattern of forward prices,
250
as you can see from both Chart 1, for wholesale
200
(For what it's
gas, and Chart 12 for shipping costs.
150
worth, the spot price of shipping containers, plotted
100
as the red line in Chart 10, has actually declined in
50
recent weeks, down nearly 30% from its peak in
It's therefore quite possible that,
mid-September.)
in a couple of years, the contribution of some of
Sources: Baltic Exchange and Bank calculations.
these items to UK inflation will be not only smaller
Panamax is a sub-index covering mid-sized vessels travelling on 5
of the 23 shipping routes of the full index. It co-moves closely with
but negative.
the overall Baltic Exchange Dry Index.
there's no doubt that the path of these global goods prices is highly uncertain.
Having said all that, Even if
it's still the right judgement "transitory", in the sense I defined earlier, that
that recent inflation rates are
doesn't mean our central forecasts are an inevitability.
In the last Monetary Policy Report the MPC produced
two forecasts for inflation, one in which gas prices followed the full path priced into financial markets, and
therefore fell steeply throughout the next three years, another in which they stabilised at a relatively high
level. Even varying just this one thing, the two-year inflation forecast was half a percentage point higher in
the second case than in the first.
And, in the meantime, we also know that these global pressures are not the only determinant of future
inflation. Arithmetically, domestic pressures have been less important so far. But the domestic labour
market has also come under increasing strain through the course of this year. I now want to have a look at
the latest evidence in this area.
10
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Unemployment higher than before the pandemic but the labour market nonetheless looks very tight
As we saw earlier, while the economic recovery this year has been predictably rapid, cumulative growth over
-
the period of the pandemic as a whole taking account of the deep trough from which the economy was
-
having to recover has not been as impressive. In the third quarter of this year private-sector output grew
by a little less than we'd
anticipated in August and was still 2% lower than at the end of 2019Q4.
In contrast, employment growth was stronger than we'd expected and
unemployment fell further (Chart 13).
And, although in the three months to September it was still a little (0.3 percentage points) higher than just
before the pandemic, and still slightly above the MPC's "natural rate" of
existing estimate of the long-run
unemployment, other indicators point to a much tighter labour market. Some survey measures of labour
availability are at their lowest level at least since inflation targeting began (Chart 14). Vacancies are at a
you'd normally
record high (the official series began in 2001). Both suggest a tighter labour market than
expect at current levels of unemployment.
Chart 13. Unemployment has surprised to the Chart 14. Survey measures point to tighter
downside in recent months labour market than unemployment alone would
suggest
0 90
Per cent
Wage growth (rhs)
5.2
10
80
Staff availability (lhs, inverted)
20
5.0
70
30
4.8
40
60
50
4.6
50
60
Data
4.4
70
40
August MPR forecast
80
4.2
30
90
100 20
4.0
99 01 03 05 07 09 11 13 15 17 19 21
Jan Feb Mar Apr May Jun Jul Aug Sep
Sources: ONS and Bank calculations. Indices: 50 = no change on the previous month.
Wage growth series weighs together the 'Permanent staff salaries'
and 'Temporary staff pay rates' indices according to
the shares of
permanent and temporary employees in the Labour Force Survey.
Sources: KPMG/REC UK Report on jobs, ONS and Bank calcs.
- -
Over the cycle, there tends to be a reasonably stable and inverse relationship between vacancies and
known as the "Beveridge curve".
unemployment, In an upswing, vacancies rise and unemployment declines.
But in recent months, at least relative to the pre-pandemic curve, the former has clearly outstripped the latter
-
(Chart 15). The labour market looks to be having a harder time clearing ensuring matches between
-
available workers and available jobs than it used to.
What's causing all this?
As far as the decline in unemployment is concerned, one possibility is that a
number of those who've lost jobs (or failed to
disproportionate find one in the first place) have quit the labour
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market altogether. We know that inactivity rose significantly last year. But participation in the labour market
- - I don't see anything
is typically cyclical Chart 16 plots annual changes against those in employment and
that unusual here. Participation has been returning alongside the recovery in the labour market.
Behaviour of participation rate doesn't
Chart 15. High vacancies suggest labour market Chart 16.
is having more trouble than usual in clearing look out of the ordinary
Percentage points
Per cent
4.5 1.0
3.5
0.5
2.5
1.5
0.0
0.5
-0.5
-0.5
-1.5
-2.5
-1.0
Employment growth (lhs)
-3.5
Participation change (rhs)
-4.5 -1.5
1986 1991 1996 2001 2006 2011 2016 2021
Vacancy rate calculated as number of vacancies / active Two-quarter averages.
workforce. 2021 Q4 estimate based on October vacancy data and Sources: ONS and Bank calculations.
the Q4 unemployment rate projected in the November MPR.
Sources: ONS and Bank calculations.
A more obvious contributor is the pace of hiring in the public sector. Since the beginning of the pandemic
-
employment in public services has risen by over 4% (Chart 17). Some of this could be temporary people
"track and trace", for example, or to administer vaccines.
hired for However, based on the spending plans in
the November Budget, the OBR expects overall employment in the public sector to carry on growing, by a
further 3% over the next three years. If some of the recent hires are temporary they look set to be replaced
by others7.
In the summer, it looked as though the remaining numbers in the furlough scheme might also be part of the
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answer. On the face of it, in July, there were still 1.6 million private-sector jobs around 6% of the total still
in the CJRS. In principle, all these people were ready and able to come back fully into employment and
But even then it was puzzling that more of them hadn't already been
quench the growing thirst for labour.
re-employed: even when furlough costs were paid in full by the taxpayer it would presumably have been
cheaper for firms just to pick up someone on furlough than to go looking for someone else and post a new
vacancy. That puzzle became more acute once firms were required to contribute progressively more to
those costs. And although the number of people in the scheme continued to decline through August and
September, that made no visible impression on indicators of labour-market tight