BIS central bankers’ speeches  3  properly – adequately weighting labour and import costs – a significant change in the Phillips curve slope is harder to detect. 13 Given the importance of imports to UK inflation, accounting for around one third of the CPI basket, the Bank of England must consider both secular and cyclical dynamics. As has been highlighted at previous symposiums, from a secular perspective, globalisation has dampened the relative prices of traded goods via a steady expansion in the pool of available labour. The entry of China, India and the ex-Soviet bloc into the world economy in the 1990s effectively and progressively doubled the global labour pool from 1.5 to 3 billion workers. 14 By taking the implication of this sustained, cumulative relative price shock into account, monetary policy has been able to deliver desired inflation outcomes. For the UK, Chart 7 shows that between 1998 to 2006, when core goods inflation averaged around –1.5%, the stance of policy supported 3.7% average services price inflation (which was largely determined by the evolution of domestic costs) in order to meet the inflation target. The questions now are how soon this process of integrating a global reserve army of labour will have run its course and whether, as services become increasingly tradable, this balancing act between domestic and global costs will become even more complex. Today, on top of these secular relative price trends, policymakers also have to take into account the cyclical disinflationary impulse from the weakness in overall global demand.
And over the past month some of the key spending and activity indicators have been strong. The balance of risks to output growth and inflation has shifted towards the upside. As those risks began to materialise, the MPC acted. The Committee started to raise interest rates to deal with the changing balance of risks last August, and has now raised rates by 75bp in total to keep inflation on track to hit the target. But, by responding early to changes in the inflation outlook, the MPC ultimately needs to raise interest rates by less than would be the case if we delayed. Looking forward, some of the factors responsible for the pick up in inflation through 2006 are likely to unwind during 2007. Oil prices have fallen by around a third since August, and will feed through to petrol and utility prices. The rise in the exchange rate will dampen the impact of higher import prices. It is also important not to exaggerate the effect of stronger demand on inflation. As we pointed out in our November Inflation Report, the ability to recruit migrant labour continues to offer a safety-valve for demand pressures in the economy, and is, no doubt, in some part responsible for the continued muted level of wage pressures. That is a particular help in present circumstances, and has reduced the extent to which interest rates have needed to rise. But how quickly and by how much inflation will fall over the next year or so is difficult to judge.