The epidemic and the waves of restrictions that accompany it have had very selective effects. They hit some areas of spending a lot more than others.
The decline in total consumer spending is almost certainly going to be longer and more widespread – affecting not only the risky contagion activities but those without risk – but on vacation schemes. This helped protect family income from the significant decline in national income last year.
But this is not the only thing that is happening. Spending on some of these “non-hazardous” things has risen faster than income – in some cases faster than it has been for many years. So it looks as if consumers used some of the money they would have spent on more risky activities – going to restaurants and so on – to buy other things instead.
This seems logical. A pound spent on one thing does not necessarily mean less than a pound in total. In fact, under some (extreme) circumstances, you might expect a substitution of this type to be a one-by-one. If people are completely indifferent between different types of consumption – if they are completely happy with “non-dangerous” things like “risky” things – then total spending will not decrease at all (relative to specific income). What was saved on one will be spent entirely on the other. The same applies if the rise in infection rates is expected to be permanent. If the future looks exactly like the present, then there is no need for saving – or hence consumption overall – to change.
These conditions are clearly unrealistic. Some things are good alternatives to dangerous activities during a pandemic. Buying things online probably isn’t that much more difficult than buying things in store. Watching a movie on screen at home can replace a trip to the cinema. But hanging out with family or friends to a bar or restaurant, listening to live music or watching a play – for the many things we’ve been forbidden for most of the past year, no agent is good. As for the dynamics of the epidemic, one thing is that it is not permanent or even slow-moving. Infestation rates rose very quickly in the spring, and once locked down, they decreased nearly the same speed in early summer. With the promise of looser restrictions as it happened, it would make sense for people to delay some spending until the day itself.
However, a reasonable degree of spending switching has clearly occurred: some areas of consumption have performed exceptionally well last year, even as others have declined very sharply. Since it is difficult for economic resources to respond to large and rapid shifts in demand, this may have mitigated somewhat the direct effect of deflation, as it were, on inflation.