And at least until resources can move in response, they may at the margin add to aggregate costs and inflation. I wondered about this effect first in the years after the financial crisis, and specifically whether it might help to explain why inflation had been less weak that one might have expected, given the large decline in GDP8. I thought at the time that one indicator of such a demand-driven misallocation might be a noticeable sectoral divergence in prices, mirroring that in demand and marginal costs. Chart 9 plots the sectoral dispersion in inflation rates, across broad components of the CPI, over the past 15 years or so. You can see that there was a spike in the series following the financial crisis and another last year. This isn’t a particularly clean indicator. The effect I’m discussing here involves cross-sectoral shifts in demand specifically. But relative prices can change for other reasons too (sector-specific changes in costs or productivity, for example), in a way that wouldn’t reflect any sort of misallocation of resources. In an effort to isolate areas where demand looks to have been the dominant influence, Chart 10 plots changes in inflation and sales through the course of last year, each dot indicating a different part of consumption, but only for those sectors where the two things went in the same direction9. Tentatively it suggests that, in areas where demand was relatively strong, prices went up by a little more than the equivalent declines in low demand areas.

And it’s because, unfortunately, we expect unemployment to rise once the furlough schemes are wound 15  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  15  down (the MPC’s central forecast in November was for a peak rate of almost 8%, despite a sharp projected recovery in output as health risks fade) that the appropriate response has been to ease policy significantly. The Committee has also said that it would need firm evidence of a significant narrowing in spare capacity, and of a sustainable return of inflation to the 2% target, before considering whether to withdraw any of this stimulus. Come what may, the MPC will continue to set policy in order to achieve the 2% inflation target, in line with its remit, over the medium term. Thank you. 16  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  16  References Broadbent, B., 2012. ‘Productivity and the allocation of resources’. Speech given at the Durham Business School. Available at https://www.bankofengland.co.uk/speech/2012/productivity-and-the-allocation-ofresources. Cantore, C., Di Pace, F., Masolo, R. M., Miranda-Agrippino, S., and Turrell, A., 2020. ‘Covid-19 briefing: epi-macro 101’. Bank Underground, available at https://bankunderground.co.uk/2020/08/07/covid-19briefing-epi-macro-101/. Charalampidis, N. and Guillochon, J., 2020. ‘The COVID-19 pandemic and the consumption of nondurables and services’. Available at SSRN: https://ssrn.com/abstract=3685336. Chari, V. V., Kehoe, P. J. and McGrattan E. R., 2007. ‘Business cycle accounting’. Econometrica, Vol. 75, pp. 781-836. Davis, S. J. and Haltiwanger, J., 1998. ‘Measuring gross worker and job flows’. In: Labour statistics measurement issues. University of Chicago Press, pp. 77-122.