Mismatch
Speech given by
Ben Broadbent, Deputy Governor Monetary Policy
Bank of England
22 July 2021
I've received helpful comments from colleagues at the Bank of England, both those on the MPC and
also Matt Corder, Andrew Hauser, Fergal Shortall, and Brad Speigner. As you might expect for
something with so many graphs I've also had lots of help with data.
For that I must thank
Nishat Anjum, Justin Beresford, Phil Bunn, Emil Iordanov, Zaar Khan, Hela Mrabet, Douglas Rendle
and Brad Speigner, as well as Spencer Hill at Goldman Sachs for the numbers in Chart 12. I also want
to give particular thanks to Mette Nielsen, for her fantastic work not just on this speech but throughout
her time in the DGMP office. After nearly four years in this job Mette has finally escaped and is
moving on to another. 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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Introduction and summary
Good morning.
We're going through a period of very rapid economic growth.
On a reasonable estimate GDP in the second
quarter of this year was probably around 5% higher than in the first and more than 22% higher than a year
earlier. That's easily the fastest year-on-year rate of growth since quarterly estimates began in the
mid-1950s, and probably a long time before that as well.
We know that rapid growth in demand tends to put upward pressure on prices. So with numbers like these
perhaps it's not surprising to see inflation going up, here and in other countries. In the UK, annual CPI
That's
inflation has risen from 1⁄2% to 21⁄2% in the past four months. more than half a percentage point higher
than in late 2019, immediately before the pandemic. The MPC expects inflation to rise significantly further, to
well over 3%, over the next six months.
But in some ways the extent of the rise is a bit surprising. The economy may have grown very strongly over
the past year but that's only
because it contracted so spectacularly in the first half of 2020, during the first
Even now, it's still a long way from where it was before all this began.
phase of the pandemic. Growth of 5%
in Q2 would still leave UK GDP 4% lower than at the end of 2019. And economic contractions don't normally
lead to higher inflation.
We can identify a number of contributory factors, things that help to account for this contrast, right off the top.
One is base effects. Arguably, comparing economic growth over the past eighteen months with the change
quite
in prices over the past twelve isn't fair. One of the reasons annual inflation has risen so steeply through
this spring is that prices of goods (energy in particular) fell significantly a year earlier, during the first phase of
the pandemic. Over the past year and a half as a whole, so including that initial drop, headline and core CPI
have both risen at an average (annualised) rate of 11⁄2-13⁄4%, a little weaker than pre-pandemic rates.
We know too that quite a bit of the drop in output has been matched, on the supply side, by the significant
numbers on the furlough scheme. The CJRS has successfully protected millions of jobs. But, because
those on furlough aren't available for it's had the
others, effect of matching part of the decline in labour
it's likely that an average of
demand with a decline in labour supply. During the second quarter of this year
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over 21⁄2 million people were furloughed more than 7% of the workforce. Some of those employees were
actually working, at least on a part-time basis, and furloughed jobs tend to be less well paid than the
average. But, taking account of these things, the scheme was still holding back effective supply in the
economy by an estimated 2%-3% in Q2 (Chart 1).
2
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Finally, we also know that the share of the population either in or actively looking for work the so-called
participation rate - has also fallen (the red line in Chart 2 is the year-on-year change). This too will have
reduced the supply of labour.
Chart 1: By protecting jobs CJRS had the effect of
reducing labour supply alongside labour demand1,2
Sources: ONS, HMRC, OBR and Bank calculations.
Chart 2: Participation likely to recover as
employment does so
Sources: ONS and Bank calculations. 2-quarter averages.
However, I doubt these things can fully account for the unusual strength in inflation (given the contraction in
the economy). Inflation over an 18-month period may have been slightly lower than before the pandemic but
the difference is barely noticeable. The cumulative drop in GDP, over the past six quarters, still comfortably
And it's perfectly
exceeds the estimated hit to supply from the furlough scheme. normal for participation to
What's
fall in downturns (not everyone who loses or quits a job immediately starts looking for another).
1
Impact on GDP estimated as the percentage hit to labour input multiplied by labour share in value added and adjusted for
compositional productivity effects. Impact on effective supply additionally strips out the contribution from those furloughed who are
searching for a new job.
2
This work was produced using statistical data from ONS. The use of the ONS statistical data in this work does not imply the
endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may
not exactly reproduce National Statistics aggregates.
3
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happened over the past year isn't a surprise, given the drop in employment
(Chart 2 provides the
comparison).
Whatever their contribution to recent rates of inflation we can at any rate expect the effects of lower
participation and the CJRS to fade soon enough. The participation rate is likely to rise again as the labour
market recovers and the furlough scheme is being wound down.
So today, in the interests of thinking about what might prove more persistent sources of inflation, I want to
concentrate on other things, stuff that's not directly evident from the aggregate In doing so I'll be
data.
expanding on a theme - the broad description might be "mismatch" - that I touched on in a talk earlier this
year and that my fellow MPC members Michael Saunders and Jonathan Haskel have also developed in their
recent speeches3.
One of the things I pointed out at that time was that, despite the weakness in aggregate UK consumption,
some areas of spending had been pretty strong. Broadly speaking, and for understandable reasons, the
pandemic had induced a sizeable shift in UK consumer spending from services to goods. And shifts in
unless) they're met by matching shifts in
spending of this sort, at least until (and supply, tend to push up
average prices. In part that's just because retail goods prices tend to be more flexible than those of services.
It's also costs are "convex" (Chart
because, at least in the short run, 3): the rise in costs and prices in areas
where there's strong demand
are larger than the equivalent declines in sectors where demand is weak.
Chart 3: Convexity means greater dispersion in
demand increases average costs
3
"The inflation outlook" speech given "Will the pandemic "scar" the
Saunders (2021) during an online webinar and Haskel (2021)
economy?" speech given in online webinar at the University of Liverpool Management
School.
4
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in response to what is a global pandemic, we've seen similar
Perhaps unsurprisingly, shifts elsewhere.
Across the OECD as a whole, consumption of services in the first quarter of this year was still well below
- -
pre-pandemic levels, but spending on goods durables in particular was significantly higher (Chart 4).
Compounded by specific hits to supply in some areas these have contributed to large rises in the price of
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many traded goods not just oil, but other basic commodities and some intermediate manufactures, such as
computer chips, as well. Indeed in several cases it's not even been possible to get hold of such things,
These "bottlenecks" are what you'd expect to see if you had a more angular,
except after a long delay.
"L-shaped" version of the smooth cost curve in Chart 3 (Chart 5).
Chart 4: Switch from services to goods has been a
global phenomenon
Sources: OECD Quarterly National Accounts, IMF World Economic
Outlook and Bank calculations.
Chart 5: Production limits have led to bottlenecks and
steep price rises for some traded goods
Nor have these shifts been limited to goods versus services. In the UK, there seems to be quite a bit of
divergence in demand even within sectors, not just between them. Some of this may reflect differences
across regions in the strength of the recovery - there are indications that activity has been slower to return in
cities than in less urban areas. And whatever the underlying causes of this dispersion, it seems to have
resulted in a degree of mismatch in the labour market. Some firms are finding it hard to recruit people, even
as others have kept significant numbers on furlough. If only at the margin, this mismatch may have added to
5
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doesn't fall
near-term pressure on wages. The full-time pay of those on furlough but, where there are
shortages, firms have to pay more4.
In January, I felt that these mismatches would probably get ironed out over time. If the pandemic had
caused significant shifts in demand those would be reversed as economies recovered: we were likely to see
the strongest growth in the areas hardest hit during the downturn, and in which there was therefore more
they'd
spare capacity. And if these shifts turned out to be more persistent in time be matched by
corresponding reallocations of supply.
For tradable goods, I still think this is a reasonable central case. The shift towards goods demand is unlikely
-
to endure forever and there may already be some early signs that consumer spending here and in other
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countries is rotating back to services. And in many of these markets supply looks to be reasonably
"elastic", at least over the medium and longer term: it responds positively to higher prices, ensuring a degree
of self-correction (you can think of this as a flattening out of the cost curves in Charts 3 and 5). For most
non-oil commodity prices, for example, periods of rapid growth tend to be followed not just by lower inflation
There's evidence of the same
but by rates of inflation that are actually below average. mean-reverting
tendency in manufacturers' input prices in aggregate.
It may also be a reasonable central case in the domestic economy but here things are more uncertain.
Some shifts in spending may stick. If significant numbers of people continue to work from home, for
-
example, the resulting changes in the pattern of spending away from city centres, and on transport, and
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towards other areas and other goods and services could endure. And it would take time to shift resources
- people, capital, know-how - accordingly. The UK labour market is flexible and here too there are early
signs that the degree of mismatch may be easing a little. But in some cases that may take time and it may
take extra costs.
As is often the case, therefore, the behaviour of labour costs will for me be important in judging the
This won't be there's still a great
appropriate stance for monetary policy. straightforward. Unfortunately,
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deal of noise in the earnings data base effects, shifts in furlough and in the composition of employment are
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all still distorting official estimates of wage growth but they are nonetheless a key area of focus.
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Let me now go through these two broad areas in more detail first traded goods and then the domestic
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labour market before wrapping up with some implications for what matters for policy.
The strength of global goods price inflation: shifts in demand and constraints on supply
The upside surprises in inflation, here and in other countries, have been concentrated in prices of physical
goods. Chart 6 plots the two series in the UK. For the first time in quite a while, goods price inflation is
4
-
Put another way, mismatch in the labour market tends to raise the rate of unemployment consistent with stable wage growth the
so-called "NAIRU".
6
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higher than that in services. This has happened before briefly in 2008, 2011 and again in 2017. But
generally, because productivity grows faster in the production of goods (their relative cost of production
therefore declines), inflation is usually lower than in services.
Chart 6: Higher inflation driven by goods prices;
inflation in services has been below average
Sources: ONS and Bank calculations.
Chart 7: Some of that driven by higher oil prices; effect
on CPI inflation likely to be temporary
Sources: Bloomberg Finance L.P., ONS and Bank calculations.
Some of this is related to base effects from the collapse in oil prices last spring. The rebound since has
comparisons for energy prices, something that's likely to go further in
pushed up the year-on-year the coming
months (Chart 7 plots the change in sterling oil prices against the contribution of energy to overall CPI
inflation). A big jump in oil prices was also the main cause of rapid goods-price inflation in 2008.
But it's not the only reason inflation in "core" goods prices, which excludes food and
this time around:
been
energy, has also risen noticeably. And unlike those earlier episodes in 2011 and 2017, this hasn't
(Because they're more traded than services, goods prices are
caused by a big drop in the exchange rate.
more sensitive to the cost of foreign currency.)
7
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Instead, it reflects a much more global trend. Prices of retail goods have accelerated everywhere, to a
greater extent still at the wholesale level. Some of the more eye-catching trends have been in basic
commodities. Chart 8 plots wholesale price indices for oil, metals and agricultural goods. The latter two are
aggregate measures. The six-fold rise in the price of US lumber provided one of the more spectacular
examples for an individual commodity (Chart 9).
Chart 8: Non-oil commodity prices have also risen
sharply
Sources: S&P Dow Jones Indices, Bloomberg Finance L.P and
Bank calculations.
Chart 9: The spike in lumber prices didn't last long
Sources: CME Group5 and Bank calculations.
-
But there have also been sharp price increases further up the supply chain one notable example is
computer chips. And the overall picture, evident in both surveys and official data, is that manufacturers the
world over have been facing significantly higher prices for their inputs than they were not just some months
ago but even before the pandemic (Chart 10). In many cases (Chart 11) firms have been unable to get hold
of them at all, except with long delays, with knock-on effects on their own delivery times.
5
CME Group market data is used under license as a source of information for certain Bank of England products. CME Group has no
other connection to Bank of England products and services and does not sponsor, endorse, recommend or promote any
Bank of England products or services. CME Group has no obligation or liability in connection with the Bank of England products and
services. CME Group does not guarantee the accuracy and/or completeness of any market data licensed to Bank of England and shall
not have any liability for any errors, omissions, or interruptions therein. There are no third-party beneficiaries of any agreements or
arrangements between CME Group and Bank of England.
8
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Rises in manufacturers'
Chart 10: input prices often
followed by below-average rates of inflation
Sources: ONS and Bank calculations.
Chart 11: Shortages have had knock-on effects on
manufacturers' delivery times
Sources: IHS Markit/CIPS.
But if demand in aggregate is still lower than it was at that time, across the developed world as a whole, how
come traded goods prices are significantly higher? And what does the answer tell us about future trends?
In some cases there are specific problems with supply. Semiconductor production, for example, has been
hampered by a series of weather-related problems in the major producers in Asia and the US6 and also, on
occasion, by outbreaks of Covid among factory workers7. More generally, affecting trade in all goods, there
have been severe constraints on shipping capacity through the first half of this year. The fact that China
began to recover earlier than other countries meant a reduction in effective capacity (containers were fuller in
Covid outbreaks and restrictions mean it's been taking longer
one direction than the other). to load and
6
These include a fire at one of the largest semiconductor factories in Japan, a shortage of water at some factories in Taiwan and winter
"A shortage", US
storms and power outages in Texas that halted production for a month at some plants (see semi-troubling Daily,
Goldman Sachs, 24 April 2021).
7
See, for example, "Taiwan's outbreak spreads to chip companies", Financial Times, 8 June 2021.
Covid-19
9
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unload containers, leading to blockages at many US and Asian ports. The week-long closure of the
Suez Canal, a major thoroughfare for trade between Asia and Europe, added to these problems8.
As we saw in the introduction, ours isn't the
A good deal of the explanation also lies on the demand side.
only country where consumer spending seems to have shifted from services to goods. And in several
- -
places, investment naturally more concentrated on goods than services has also picked up strongly.
At least in part this is because firms have some catching up to do, having spent very little on new capital
- -
equipment last year. The same applies to durable goods for consumers cars, for example where
demand collapsed in 2020 but has recovered strongly in 2021. There is evidence that the stimulus cheques
households, as part of the new administration's fiscal expansion,
sent to US have been spent
disproportionately on durable goods (as one might expect of any one-off source of income).
The semiconductor sector may represent the starkest example of this collision between stronger demand
and weaker supply. Chart 12, for example, plots shipments of PCs by the major five global producers
against exports of semiconductor components from Japan. The first rose significantly through the course of
last year, boosted by the general shift away from consumer services to goods, and in particular the necessity
of working more from home and, for firms, of moving activity online. But semiconductor production
contracted in Japan and other major producing countries through the latter part of last year and the result
was a marked drawdown in inventories and a sharp rise in prices.
Chart 12: Demand for PCs rose steeply last year but
supply of components declined
Source: Goldman Sachs, see Goldman Sachs (2021, see footnote
6) for further detail. Changes on a year ago. Semiconductor
components include wafers, flash memory and DRAM memory,
weighted by 2017 shipment values.
-
This has now begun to appear at the retail level in prices of goods that rely on computer chips computers
themselves (obviously) but also audio-visual goods and new cars (Chart 13 plots their average inflation rates
8
In late March, a large container ship (the Ever Given, a quarter of a mile long) was buffeted by strong winds and ended up wedged
across the width of the canal. It took six days to dislodge the vessel and re-open the canal. A useful summary of the problems in
can be found here: Ship Technology, 29 April
shipping supply in general "Global shipping container shortage: the story so far", 2021.
10
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in the US and UK). The resulting problems and delays in car production have had knock-on effects on prices
of second-hand vehicles, especially in the US.
Chart 13: Prices of goods that use computer chips
have risen sharply in the US and UK
Sources: ONS, BEA and Bank calculations. Chart based on
Goldman Sachs (2021, see footnote 6). 12m inflation rates for
semiconductor-intensive spending categories: audio-visual goods,
photographic/optical equipment, computers, household appliances
and new cars. Excludes new cars before 2011; earlier data
rescaled for comparability.
Wholesale goods-price inflation likely to soften in time
One can't be precise about these things, but I do think that, for reasons
For how long might this continue?
on both the demand and supply side, these very rapid rates of wholesale goods-price inflation are likely to
subside at some point. Indeed, in some cases they could even go into reverse.
When it comes to demand, I think it's reasonable to expect shifts
caused by the pandemic to narrow again as
the threat of it recedes. Consumers will rotate some of their spending back to services. To the extent strong
demand for durable goods specifically is to make up for ground lost last year that only needs to be done for a
while: people buy a new computer or car only once every few years, not every quarter. Indeed there may
- -
already be signs tentative but visible that these imbalances are beginning to diminish. Retail sales fell in
May, in both the US and UK. Spending on Barclaycard doesn't suggest any reacceleration in June, in this
-
country (Chart 14). It does on the other hand suggest that other areas of spending those most heavily
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affected by the lockdowns, like hospitality and restaurants has been growing faster than that on goods
since the economy re-opened in April.
Second, supply in some of these goods markets is ultimately quite "elastic":
over time, higher prices
encourage higher production, ensuring a degree of self-correction.
For some basic commodities the response could be relatively straightforward: it might simply be a question
We've already seen a small example of
of reopening an existing plant, mine or sawmill. this. The big jump
in US lumber prices through the winter (Chart 9 again) encouraged greater supply which in turn led to a
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significant correction in prices. Lumber prices are now two-thirds below their peak in May, implying that
annual inflation rates are likely to be negative next spring. In the data, many non-oil commodity prices seem
to exhibit the same
"mean-reverting" tendency9.
Chart 14: Areas of consumption hit hardest last year
have grown more strongly in the recovery
Sources: Barclaycard and Bank calculations.
Data weighted by pre-Covid consumption share. 2y growth from
March 2021 and 1y growth before that due to Covid base effects.
It's rare that
This is perhaps an extreme example. increasing supply is as straightforward as chopping down
(and even lumber production isn't as simple as
another tree and cutting it up that). Producing a
micro-controller for a car, for example, is a much more complicated process and it takes significantly longer
for supply to respond. Many analysts have said they expect the chip shortage to persist into next year.
Even here, however, many also believe that we may already have passed the period of maximum strain.
The Taiwan Semiconductor Manufacturing Company, a major producer, said last week that its own
production had risen 30% in the first half of 2021, relative to the same period a year earlier, and that it
expects full year growth of 60% (in response to what have been much milder price rises I think this counts as
"elastic" The Chief Executive of the company said
relatively supply). "we expect the shortage to be greatly
reduced for TSMC customers starting this quarter".10
One would expect this to take some of the heat out of semiconductor prices, and those of the goods that rely
on them. As for shipping, which has affected the time and cost required for all international goods trade,
expectations of future prices, as indicated by forward contracts (Chart 15), imply material declines over the
next year or so.
9
'Unit roots in real primary commodity prices? of the Grilli and Yang data set'.
See, for example Winkelried (2021), A meta-analysis
Journal of Commodity Markets, article in press.
10
See "TSMC signals global chip crunch may be easing", Financial Times, 15
July 2021.
12
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Chart 15: Forward contracts suggest material declines in shipping costs
Sources: Baltic Exchange and Bank calculations.
Panamax is a sub-index covering mid-sized vessels travelling on 5 of the 23 shipping routes
of the full index. It co-moves quite closely with the overall Baltic Exchange Dry Index.
-
And what the longer run of data indicates is that this mean-reverting property in prices the tendency for
-
rapid increases to be followed not just by lower but by below-average rates of inflation applies not just to
non-oil commodities or particular individual goods but manufacturers' input prices in aggregate. This is
It's also
(more or less) apparent from Chart 10. confirmed by more formal statistical tests.
But retail goods price inflation likely to rise further in the near term
Clearly there are risks around these judgements. Rebuilding inventories and clearing backlogs will take time.
So there may in some cases be continuing pressure on suppliers of wholesale goods even after (and if)
growth in final demand from consumers falls back.
it's possible that not all the rises in wholesale goods prices that we've already seen
In addition have yet been
-
passed on to the retail level, at least in the UK (Chart 16). If so, then annual inflation in retail goods both in
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aggregate and excluding energy is likely to rise further before it starts coming down.
Chart 16: Goods price inflation likely to rise further in
the months ahead
Sources: ONS and Bank calculations.
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The third reason for a degree of caution is that these mismatches between global supply and demand for
goods aren't the only ones, it seems. There are also signs of the same - excess capacity in some areas,
- And although they're less startling than in some areas of
excess demand in others within the UK economy.
It's these
traded goods, it may take longer, if they persist, to accommodate via matching shifts in supply.
more domestic mismatches we'll have a look at
now.
Domestic mismatch and the UK labour market
Despite the prevailing lockdown, signs of a recovery in the UK labour market began to appear early this year.
Surveys suggest employment stabilised in February. The numbers of unemployed and on furlough peaked
at around the same time. Job vacancies, which had actually reached a low during the first lockdown, began
to rise sharply.
Yet in some ways it's odd -
All this seems of a piece. odd, at least, if you think of employers as identical and
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employees as a similarly homogeneous group that vacancies and the use of the furlough scheme should
co-exist at all. Imagine the corporate sector was like a single representative firm, selling only one thing and
employing people with identical skills and characteristics (whose wages are therefore all the same as well).
Why would it choose to create a new job, with all the associated search costs, when it could simply
re-employ someone on furlough? Why should unemployment start to fall when there were still around five
million people on the CJRS, as was the case in late January?
There are always job vacancies in the economy, even when unemployment is quite high. So we know firms
and workers aren't entirely homogenous.
Not every worker is suitable for every job. Nor was every job
eligible for the CJRS scheme to begin with. But the fact that vacancies should have picked up so strongly,
while there were millions still on furlough, does suggest that the early phase of the recovery might have been
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quite uneven that the jobs lost in the downturn may not have not been the first to come back during the
upswing.
The broad distribution of vacancies across sectors provides some supporting evidence for this. One way to
measure labour-market mismatch is to look at the sectors in which there are vacancies and those in which
If there's a good correlation between the two -
unemployed people last worked.11 if the people looking for
-
work have experience in the sectors in which firms are looking to hire mismatch (on this particular
measure) is low. When there's a poor correspondence between available workers and available jobs the
standard measure, in which "available workers" are defined
measure is high. In Chart 17 the blue line is the
as the unemployed. The orange line broadens the concept to include those on furlough as well. This is a
But, for what it's worth, this measure of
relatively crude measure as the sectors we use are pretty broad12.
11
Haskel (2021) "Will the pandemic "scar" the economy?" speech given in online
See also webinar at the University of Liverpool
Management School.
12
We have vacancies only at what's known as level (i.e. across a crude division
the "section" into 18 broad sectors). Chart 18 uses
a level (100 sectors).
official output data at "two-digit" The DMP allows us to look at variations at the level of individual firms.
14
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mismatch rose sharply during the pandemic and, despite the recovery in the first half of this year, remains
relatively elevated.
One reason for this might be continuing divergence in demand. Chart 18 plots the degree of dispersion in
output growth across sectors, this time at a much finer level of disaggregation, over the previous two years.
As we know, the pandemic was highly skewed in its effects, hitting some sectors and regions far harder than
others. Some even benefited. You can see that in the big jump in the series from the second quarter of last
And at least up until the first quarter of this year (we don't have any data since) there was no sign of
year.
any sort of correction.
Chart 17: Relatively poor correspondence between
available jobs and furloughed employees so far
Sources: ONS vacancy and Labour Force Survey data and Bank
calculations.
Chart 18: Up until 2020Q1 there was still significant
sectoral dispersion in output
Sources: ONS and Bank calculations.
-
Interestingly, if you go finer still, and measure the same sort of variance in sales across individual firms
-
something our Decision Maker Panel (DMP) survey allows us to do you find that quite a bit of it has
occurred within sectors, not just between them.
15
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One possible reason is that there appear to have been shifts in spending not just across different sectors but
also across different parts of the country. We can't tell from official data, in any timely way, exactly what's
happened to activity in different regions. Firms in the DMP still report weaker demand in urban than rural
plot a few indicators of
areas, relative to pre-pandemic levels (Chart 19). Charts 20(a)-(c) "real-time"
-
consumer spending restaurant bookings and Google tracking numbers for different kinds of shopping trips
- for London and for the rest of the UK. In all three cases the figures for the capital are still a long way short
of pre-pandemic levels, those for other parts of the country close to or some way above it. One would need
to do a little more digging to check the point. But it would make sense that more working from home should
have reduced consumer demand in city centres and increased it elsewhere. We know that the same has
happened to the demand for housing, in the UK and in other countries. And it's therefore possible that some
firms in urban areas are keeping people on furlough even as those in the same sector, but outside cities, are
finding it hard to recruit people.
Chart 19: Firms in DMP see worse effects of
pandemic in urban area13
Sources: Decision Maker Panel, ONS and