Indeed, given the scale of the exchange rate shock, it is possible inflation could overshoot this target in the period ahead. In principle, this combination of inflation-above-target and output-below-capacity poses a dilemma for monetary policy. Tighten to counter the first or loosen to cushion the second? In practice, in my personal view, there is no real policy dilemma here and little ambiguity about the appropriate monetary policy response, either in direction (easing) or scale (significant). One reason for saying that is because I do not think the risk of higher inflation becoming entrenched is especially great. Even before the events of the past month, the Phillips curve here in the UK (the relationship between wages/prices and unemployment/output) was as flat as a pancake. In a world of potentially stalling output and rising unemployment, I find it hard to imagine wage and price pressures will intensify greatly in the period ahead. Indeed, it is striking that despite the sharp fall in the exchange rate and the temporary boost this will provide to inflation, there are no indications so far of this having dislodged mediumterm inflation expectations. The most direct measure we have is from financial markets where they have shown few signs of ticking-up (Chart 32). Indeed, at longer maturities inflation expectations have nudged down from already fairly low levels. With household and company measures of inflation expectations also at historically low levels, in my personal view the risk of inflation expectations being dislodged to the downside is greater than on the upside.
Indeed, those in the bottom 20% have seen their wealth fall over this period. By contrast, those in the top quintile have seen their wealth increase by almost 20%. This uneven pattern of gains and losses in wealth has widened what was already a fairly wide wealth divide: in 2010, those in the bottom income quintile had average net wealth of £ compared with £ for those in the top quintile. That means the gains in social well-being since 2008 are likely to have been considerably more modest than the rise in headline wealth would imply: these gains have largely been harvested by the already-asset-rich and not at all by the already-asset-poor. Looking across the income distribution, then, it is clear that recovery has been associated with both the incomes and, more strikingly, the wealth of the least well-off having broadly flat-lined. Recovery has not lifted all boats, especially some of the smaller ones. This pattern may go some further way towards solving the recovery puzzle. Whose recovery? To a significant extent, those already asset-rich. (c)  Age distribution  A third dimension of recovery is how it has affected different age groups. Chart 18 looks at the evolution of nominal average hourly earnings across different age groups. It suggests a significant inter-generational income shift has been underway over recent years. Nominal earnings of those under-30 have risen by a cumulative 6% since 2007, while those over-50 have seen cumulative gains of 22%.