It is possible that some households planned on the basis that this increased economic stability would persist indefinitely. If so, the events of the past two years would have come as a substantial shock. Households’ consumption has slowed sharply since the beginning of 2008. Indeed, consumption is estimated to have fallen for the past five consecutive quarters, the first time this has happened since records began in 1955. Relative to an average rate of increase, the level of consumer spending has fallen by around 7½% since the start of 2008, and the savings rate has increased sharply. There has already been a considerable adjustment in households’ spending. In the near-term, the prospects for consumption depend importantly on the performance of the labour market. Although there has been a substantial fall in employment over the past year or so, the size of this adjustment to date has, if anything, been less than we might have feared given the falls in output. This may partly reflect the greater degree of wage flexibility that has been apparent in this recession compared to that in either the 1980s or 1990s. 6 This greater flexibility has meant that more of the burden of firms’ adjustment to the recession has been spread over the workforce as a whole, rather than on those losing their jobs.
My own judgment was that the uncertainty surrounding both the economic outlook and the effects of asset purchases made it difficult to have a strong view as to the relative merits of increasing the asset purchase programme to £ billion or £ billion. Indeed, the inflation projection that was published in the August Inflation Report suggested that either policy was consistent with hitting the inflation target, depending on the future path of interest rates. For me, the decision came down to an assessment of the risks of doing too much versus the risks of doing too little. With regard to the potential risks of doing too little, my main concern was that nominal demand would not recover to a level consistent with hitting the inflation target. My main worry with doing too much stemmed from the uncertainty associated with using asset purchases as a policy instrument. We do not have much experience of conducting monetary policy via asset purchases and there is a risk that their effects will be transmitted through the economy in ways we do not predict and do not want. For example, the substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify. I placed considerable weight on both risks and thought that they were best balanced by an expansion of the programme to £ billion. 6  BIS Review 114/2009  I am hopeful that we have started along the road to recovery.