Two inflation scenarios: and what to do about them

In previous outlook reports, our outlook for 2021 was based predominantly around the ‘Good Recovery’ scenario which sees economies reopening throughout the year as restrictions are lifted and vaccines, along with a natural immunity, allow many countries to reach herd immunity by the second half of the year. 

It continues to be our single-most-likely outcome at a 40% probability, however it has dropped 10% since the previous quarter, making room for upside risks in inflation. Why has it changed?  

To date we have been relatively sanguine about inflation – it has featured as a scenario in all our forecasts for the past year, but generally classed as an odds-against risk, at least in 2021. That remains the case in our single-most-likely scenario – ‘good recovery’ - this time too. In that world, we take a relatively optimistic view about the elasticity of aggregate supply.