If, as seems likely, resources in different sectors are highly specialised – the physical and human capital suitable for one area aren’t as productive in others – the effect of this shift on aggregate supply is immediate. This is what the MPC was getting at when it said in the last Inflation Report that a “reduction and reorientation of trade and supply chains… may result in some existing supply capacity becoming obsolete.”  The second point involves the importance of expectations, something else the MPC has emphasised. At least until the formal date of departure, and possibly for some time afterwards, the effects of Brexit will depend centrally on what people expect it to do over the future. Those expectations are neither fixed nor uniform – some people are optimistic about its effects, others less so. It’s partly these differences in expectations that can lead to independent moves in demand and the exchange rate. In particular, you can see the current inflation we’re experiencing as the result in part of a more pessimistic view of Brexit in financial markets – above all in the foreign exchange market – than among consumers. This gap in expectations helps to explain why, in Chart 2, the latest figure for the real exchange rate – the diamond towards the right of the graph – is well below the line for domestic demand growth.
The estimated regression line has clearly shifted to a lower position since the crisis and the period of weaker productivity growth that has ensued. However, if people come to accept the implications of that weaker productivity trend for the real wage increases they can expect to receive – the “norm” for real pay growth being one thing that determines the position of the Phillips curve – that’s precisely what you’d expect to see. It would also shift leftwards if structural improvements in the labour market had lowered the equilibrium rate of unemployment. The MPC reduced its estimate of that equilibrium rate, from 5% to 4½%, in February. In real time, as it’s happening, it’s statistically  Chart 10: Phillips curve: down but not out  difficult to distinguish a shift from a flattening and there is clearly room for caution about our forecasts for growth of wages and unit costs. But, over time, I think the evidence looks more in favour of the former. The curve still seems to have a slope – all else equal, a tighter labour market is likely to mean faster wage growth. Conclusion  Sources: ONS, Bank of England, and Bank calculations. I was in Aberdeen earlier this year and, when asked by a wily reporter what I planned to vote at 11  the following MPC meeting, fobbed off the question by referring to a number of “imponderables” . I’ve talked about some of those today.