26 At a minimum, when taken together with survey indicators that continue to point to solid pay growth for new recruits, recent data give welcome reassurance that the risks associated with a deflationary mindset in the labour market have likely fallen significantly. Further positive wage developments should be supported by a continued tightening in the labour market. Job-to-job flows remain around post-crisis highs and the ratio of vacancies to unemployment is now back to its pre-crisis average. However, what matters for inflation is not wage growth in isolation but wage growth relative to productivity. Put simply, firms are less likely to raise their prices if higher wages reflect more output per hour worked. Along with faster wage growth, there have been signs of faster productivity growth since the turn of the year. This may well mean firms’ unit labour costs have not picked up quite to the degree we had expected in our May Inflation Report. It’s too early to be definitive. Weighing past disappointments and recent indications of a pick-up, it is prudent to recognise that two-sided risks to productivity growth remain. What is clear is that to return inflation to target, growth in labour costs must pick up further from their current rate of less than one per cent. The extent needed depends on what is happening to other costs.
11 Latimer notes that “…between the middle of the twelfth century and the middle of the thirteenth century there was an enormous increase in the quantity of silver coins in England.” As well as the possibility of a general increase in the European silver supply (especially with the opening up of the Harz silver mines in eastern Germany), it is likely that silver inflows to England in particular were boosted as the counterpart to a sizeable private trade surplus – probably resulting, especially, from the success of the wool trade with Flanders. Over several decades, these silver inflows were likely to have much more than offset the “public sector deficit” as silver leaked out to pay for the protection of Normandy as well as the occasional trip to the Holy Land. As a result, the balance of payments was probably in surplus for years, with the consequent increase in the silver money supply going unsterilised. Even to a thirteenth century Englishman, global monetary conditions mattered. Would Britain’s constitutional history have been different had King John lamented: A Central Bank! A Central Bank! My Kingdom for a Central Bank!? He needed one because other factors reinforced monetary developments, including the usual suspect – financial innovation. Specifically, developments in the common law made land an increasingly liquid asset, and therefore one capable for the first time of being used as a store of wealth.