This evidence suggests the pulse of the Phillips curve has quickened as the labour market has tightened. Unlike over much of the past decade, estimated wage equations are now broadly tracking pay (Chart 5). A year ago, the Bank’s forecasts of average weekly earnings growth into mid-2018 was 2.5%. Wage growth in the year to 2018 Q2 was 2.4%. 13  All speeches are available online at www.bankofengland.co.uk/speeches  13  How are these pay developments affecting the monetary policy outlook? Inflation is currently above the Bank’s 2% target. That is entirely due to the effects of past external price shocks, notably sterling’s post-referendum depreciation. As these external effects fade, inflation is projected to be maintained at or slightly above its target by a slow build in domestic cost pressures, underpinned by a rise in wage growth. The rise in wages projected by the Bank is, to coin a phrase, limited and gradual. Private sector pay is assumed to rise from 3% currently to around 3 ¾% three years hence, or around 25 basis points per year. That is below the pace at which wage growth has built over the past few years. Over the same period, unemployment is projected to fall further below its natural rate, though again at a slower pace than over recent years. The path of domestic costs in the economy depends on developments in firms’ productivity, as well as in pay. Weak productivity means even low nominal pay increases can be inflationary.
21  All speeches are available online at www.bankofengland.co.uk/speeches  21  Chart 8: Financial markets’ inflation expectations (5 year – 5 year breakevens)  Per cent  9 8 7 6 5 4 3 2 1 0  1985  1988  1991  1994  1997  2000  2003  2006  2009  2012  2015  2018  Sources: Bloomberg and Bank calculations  Chart 9: Involuntary part-time share of employment and average net desired hours, alongside unemployment  Per cent  Hours per person  10  0.7 0.6 0.5  8  0.4 0.3  6  0.2 0.1 4  0 -0.1  2  -0.2 -0.3  0 2001  -0.4 2003 2005 2007 2009 Involuntary part-time share (LHS) Net additional desired hours (RHS)  2011  2013 2015 2017 Unemployment rate (LHS)  Sources: ONS and Bank calculations. Notes: Involuntary part-time workers are those that would like a full-time job but haven’t been able to find one. Average net desired hours is the average number of additional hours that employed individuals would like to work at their current hourly rate.