All the more so when each layer has its own, distinctive characteristics: some drivers of inflation being more secular in nature, others more cyclical; some consistent with the ‘divine coincidence’ of efforts to stabilise demand and price developments, others implying management of difficult trade-offs between activity and inflation. But the challenges for monetary policy are greater when the factors not only cumulate, but also interact with one another in possibly divisive and often unhelpful ways as regards the pursuit of price stability. In other words, when the various underlying drivers of policy decisions are not only additive as regards their implications for inflation, but also potentially multiplicative. To give the most straightforward but also immediately relevant example: the scope for energy price rises to trigger the infamous second round effects in price, wage and cost dynamics – the dynamics that threaten to create persistence in inflation even after the original external stimulus abates – is greater when the corporate sector enjoys pricing power, and the labour market is tight. Beyond the implications of the individual risks themselves, the combination of and interaction among those risks can create additional challenges for monetary policy. This is something to which I will return in discussing the outlook for UK monetary policy. Factors underlying monetary policy decisions But let me start by reviewing the three underlying drivers of policy decisions that I just listed.
This would probably also prove counterproductive, as many studies show that the exemption for labour would not reduce, for instance, cross-border black market crafts and services – what a special transition period creates are barriers to mobility for qualified, professional workers for which there is often a large demand. At the same time, there are no signs, in the studies made by the European Commission, and others, that free mobility for labour would lead to mass immigration from the east. Although the comparison is slightly lame as we now have the Schengen Treaty, there was no mass immigration to Germany from Portugal and Greece when they became members of the EU. If there is an opportunity for improvements in their home country, most people prefer to stay there. There is also a risk that we are exaggerating the costs of allowing the new countries to be part of the EU's agricultural and regional policy. The high costs and peculiar incentives of the EU's agricultural policy are a problem in themselves, which require a new way of thinking, but in my opinion it is not the actual enlargement eastwards that is the major stumbling block. According to the Commission's most recent calculations (based on a gradual increase in the support to the new member states), the total budget cost of the enlargement would be equivalent to only around 0.15 per cent of the EU's total 1  The Centre for Economic Policy Research presented the first major study in 1997 by R. Baldwin, J.F.