The pandemic, and the waves of the restrictions that have accompanied it, have had highly selective effects. They’ve hit some areas of spending much harder than others.
The decline in aggregate consumer spending would almost certainly have been more protracted and more widespread – affecting not just activities that involve infection risk but those that do not – but for the furlough schemes. These have helped shield household incomes from the big drop in national income last year.
But that’s not the only thing going on. Spending on some of these “non-risky” things have actually risen faster than incomes – in some cases faster than they have for many years. So it looks as though consumers 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.