Since 2004, global oil prices have more than doubled, a far sharper rise than at any time since the 1970s, when as some of you may recall, inflation took off, eventually peaking at 25%. Then, last winter, UK wholesale gas prices surged, as a result of supply and storage problems that were, in large part, specific to our market. The resulting increases in household gas and electricity bills have had a large direct impact on inflation. By December, they alone were directly contributing 1pp to the measured inflation rate. These energy price shocks are now starting to unwind, at least for now. The oil price has fallen back, although the outlook remains uncertain – the thin margin of spare capacity continues to make oil prices unusually sensitive to all kinds of news, from politics to weather and supply. We can have more confidence that the gas price shock is ebbing. The temporary supply and storage issues which caused the price spike last winter have been addressed. Together with a milder winter, this has helped to bring wholesale prices back to where they were two years ago, and retail prices have started to fall back. So, just as energy price increases have boosted inflation over the recent past, it now seems likely that energy price falls are going to reduce it – possibly quite sharply – over the year ahead. Indeed we expect inflation to fall below the target by the end of 2007. Let me make two observations about this episode.
In our better moments, we reflect on all that we have learnt, through bad times as well as good. But there are days when we peer in the mirror and ask anxiously whether we have lost our freshness and drive. Have we become too set in our ideas and in our ways? Have others stolen a march on us? Have we become, to a degree, prisoners of our own past Maybe even victims of our own perceived success? The only way to deal with such fears is to confront them. That is a far larger task than I can do justice to tonight, and it needs to be part of a continuing effort to improve our performance. But let me try and give you an overview of some of the main issues in the remainder of my remarks. 5  “The Inflation Target five years on”, lecture delivered by Mervyn King at the London School of Economics, October 1997. BIS Review 20/2007  3  Intellectual development I want to start with the MPC’s intellectual development. As the world around us changes, it throws up new policy challenges which force us to examine old ideas and develop new ones. So the MPC has been on an intellectual voyage of discovery since it was established. The formation of the MPC unleashed a ferment of intellectual debate and activity inside the Bank. It was a thrilling time for those who were closely involved.