Even varying just this one thing, the two-year inflation forecast was half a percentage point higher in the second case than in the first. And, in the meantime, we also know that these global pressures are not the only determinant of future inflation. Arithmetically, domestic pressures have been less important so far. But the domestic labour market has also come under increasing strain through the course of this year. I now want to have a look at the latest evidence in this area. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  Unemployment higher than before the pandemic but the labour market nonetheless looks very tight As we saw earlier, while the economic recovery this year has been predictably rapid, cumulative growth over the period of the pandemic as a whole – taking account of the deep trough from which the economy was having to recover – has not been as impressive. In the third quarter of this year private-sector output grew by a little less than we’d anticipated in August and was still 2% lower than at the end of 2019Q4. In contrast, employment growth was stronger than we’d expected and unemployment fell further (Chart 13). And, although in the three months to September it was still a little (0.3 percentage points) higher than just before the pandemic, and still slightly above the MPC’s existing estimate of the long-run “natural rate” of unemployment, other indicators point to a much tighter labour market.
- N21 MPR  3.5 2023 2024 Unemp. - Scenario  Sources: ONS and Bank calculations. In the literature estimates of the policy lag seem to vary quite a bit. In Cloyne and Hurtgen (2016, ‘The macroeconomic effects of monetary policy: a new measure for the United Kingdom’, American Economic Journal: Macroeconomics), the authors find that the peak effect of changes in UK monetary policy takes well over two years to come through. Cesa-Bianchi, Thwaites and Vicondoa (2020, ‘Monetary policy transmission in the United Kingdom: a high frequency identification approach’, European Economic Review) provide evidence of material effects after barely a year. 2  4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  In other words, there would’ve been no way to control inflation in prices but, at the same time, leave nominal wages and nominal household incomes untouched. It’s sometimes been suggested that, had monetary policy acted to suppress it, consumers might have been protected from this rise in the cost of living. Unfortunately, that’s not true. At a fundamental level this is because monetary policy cannot, over the long run, offset real economic shocks. If structural productivity grows more slowly, for example – as it did after the financial crisis – then, ultimately, real wages will do so as well, no matter what happens to monetary policy.