Third, my visits to the Bank’s regional agencies over the past few weeks talking to businesses leave me confident wages are not about to embark on a rocket-propelled ascent. Settlements seem to have edged up from first to second gear: they are now often in the “2–point-something” zone. But with the exception of a few regions and sectors, I do not yet see evidence of wage inflation going through the gears into third or fourth. Fourth, since the May Inflation Report sterling’s effective exchange rate has appreciated a further 3%. That will exert a downward drag on demand and inflation over the policy horizon: using the Bank’s model ready-reckoners, by around 0.2 percentage points at the two-year horizon. In other words, the exchange rate news may be more important quantitatively for the two-year-ahead inflation outlook than the recent news from wages. April’s wage data was news, encouraging news. And the Phillips curve may well be reemerging after several years in hibernation. But one swallow does not a summer make. As Aristotle inexplicably did not add, “especially once you adjust for compositional shifts”. Wage growth is causing some fluttering, but not in this dovecote. One reason for that is because expectations of inflation (the MPC’s primary objective) at the two-year-ahead point (the MPC’s preferred horizon) are skewed, if anything, to the downside. Chart 18 plots the MPC’s forecasts for inflation at different horizons, alongside companies’, households’, financial markets’ and professional forecasters’ projections. At the two-year point, outside forecasters’ inflation projections lie below the MPC’s.
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