at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice used some of the money they would have spent on riskier activities – going to restaurants and so forth – to buy other things instead. this makes sense. a pound less spent on one thing needn ’ t mean a pound less in total. indeed under some ( admittedly extreme ) conditions you ’ d expect substitution of this sort to be one - for - one. if people are entirely indifferent between different sorts of consumption – if they ’ re just as happy with “ non - risky ” as “ risky ” stuff – aggregate spending wouldn ’ t fall at all ( for given income ). what they saved on one would be spent in its entirety on the other. the same is true if a rise in infection rates is expected to be permanent. if the future looks exactly like the present there ’ s no reason for saving – or therefore total consumption – to change. these conditions are obviously unrealistic. some things are good substitutes for risky activities during the pandemic. perhaps it ’ s not much harder to buy things online than in a shop. at a stretch, watching a film on a screen at home can replace a trip to the cinema. but going out with family or friends to a pub or a restaurant, listening to live music or watching a play – for many of the things we ’ ve been denied for much of the past year, there is no good proxy. as for the dynamics of the pandemic, one thing they ’ re not is permanent or even slow - moving. infection rates went up very rapidly in the spring and, once lockdown was in place, they fell almost as rapidly in the early summer. with the promise of looser restrictions as that happened, it would make sense for people to hold off on some spending until the day itself arrived. nevertheless, it ’ s clear that a fair degree of expenditure switching took place : some areas of consumption fared unusually well last year, even as others declined extremely sharply. because it ’ s hard for economic resources to respond to large and rapid shifts in demand this may have softened somewhat the immediate impact of the downturn, enormous as it was, on inflation. whether that has any implications for the medium term is less clear. the dispersion in demand and spare capacity is likely to narrow during the recovery phase. over time, if some of these shifts in demand prove more persistent, the economy

to sustain both incomes and consumer spending in the meantime. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice let me now turn to another important contributor to the anomaly in chart 1, and the main focus today – the extent to which consumers have responded to the pandemic by substituting some forms of spending for others. i ’ ll begin with what some simple economics has to say about what you might expect to happen, depending on the circumstances, and then look at a bit of evidence. the direct impact of the pandemic on aggregate consumption imagine the government suddenly slaps a big excise duty on something people buy. let ’ s suppose – just for the sake of ( wholly unrealistic ) argument – it ’ s restaurant meals. imagine too, just to make the parallel a little closer, that the government compensates you for the cost of this ( it redistributes the proceeds of the tax ). so you don ’ t lose out in terms of income. however, going out to eat still costs far more than it did, relative to other stuff. so you ’ ll probably be inclined to go less often. but what do you do with the money you would ’ ve spent? do you simply switch it to other things, leaving your aggregate consumption unchanged? or do you reduce your total spending as well, and instead save a little more? at least for the idealised consumer of simple economic theory, two things turn out to matter for this decision. one is the extent to which there are other, close substitutes for the taxed activity. if you liked cooking at home, or indeed anything else, almost as much as going to a restaurant you ’ d be more inclined to switch your spending immediately to these other things. your total consumption wouldn ’ t change much. in general, a hike in a particular sales tax will have smaller effects on aggregate spending, and result instead in more expenditure - switching, if it ’ s levied on something for which there are similar ( and untaxed ) alternatives. the other important factor is how long you expect the policy to last. if he thinks the tax hike is permanent, our idealised consumer of economic theory would substitute his spending straightaway towards other goods or services, regardless of whether they ’ re close substitutes. if not – if he expects the government to come to its senses at some point, and reverse the policy – he