And nominal regular pay growth (which strips out bonuses, but includes merit related increases in pay) has remained subdued over the past year, averaging around 2%. Assuming that the potential growth rate of the economy has not been damaged by the financial crisis (and there is no compelling evidence to suggest that it has), then this level of wage growth would be too low to be consistent with the inflation target in the medium term. Looking ahead, it is most likely that there will remain a reasonable margin of slack in the labour market, which should help contain any pressure on nominal wages and hence price inflation. But this is unlikely to persist indefinitely. Historical analysis of the UK labour market shows that the longer individuals are unemployed, the lower their chances of getting a job become. Hence, persistently high actual unemployment tends to be followed by an increase in the level of structural unemployment. Theory and empirical evidence predict that the structurally unemployed exert less downwards pressure on wage inflation. Major shifts in the pattern of employment – as we are likely to see from the shifts in growth from services to manufacturing, and from the public to private sector – tend to reinforce that effect. If structural unemployment rises sufficiently, then the downwards pressure on inflation from spare capacity will eventually start to dissipate. For now, contacts of the Bank’s Agents confirm that the margin of slack in the labour market should continue to restrain wage growth in the coming months.
We can’t be sure since no two historical episodes are ever exactly the same. Until underlying growth resumes, we can’t be certain that it will, of its own accord. At the very least, that makes me pause to consider when policy should start to be normalised or even whether further loosening might be justified. The recovery in 2010 was driven by a particularly strong contribution from business investment and stock-building (Chart 4). The latter was always likely to offer a transitory boost to overall growth as companies returned stock holdings towards their desired levels, after de-stocking during the recession. And investment was always likely to make some positive contribution – at least once delayed projects and routine maintenance were re-started. But that boost is unlikely to persist without a pick-up in final demand to justify it. And consumer spending, the most important component of UK demand, has been stagnant for a year (Chart 5). The current behaviour of consumption is markedly different to that during the 1980s and 1990s when consumption had broadly regained its pre-recession level by this point in the cycle, rather than being around 4% below it (Chart 6). BIS central bankers’ speeches  3  Chart 4  Chart 5  Contributions to 4-quarter GDP growth(a)  Household consumption(a)  Percentage points 6 4 2 0 -2  Consumption Government spending Investment Stockbuilding Net trade GDP (per cent)  -4 -6 -8  2000  2002  2004  2006  2008  (a) Investment includes valuables. excluding the alignment adjustment.