Chart 12: Pay growth has tended to track unemployment, but with notable exceptions, including during 2014, and moderation recently 6  -2  Private sector regular pay (LHS, oya) Unemployment rate (RHS, inverted scale)  5  -3  Per cent  -5  3 -6  2  Per cent  -4  4  -7  Oct 15  Mar 15  Aug 14  Jan 14  Jun 13  Nov 12  Apr 12  Sep 11  Feb 11  Jul 10  Dec 09  May 09  Oct 08  Mar 08  Aug 07  Jan 07  Jun 06  Nov 05  Apr 05  Sep 04  Feb 04  Jul 03  Dec 02  -9 May 02  0 Oct 01  -8  Mar 01  1  Source: ONS and Bank calculations  It is possible that the rate of unemployment at which the economy can operate without generating accelerating inflation is lower than previously thought, meaning less pressure on wage growth at any given jobless rate. This could be, for example, because job matching has become easier with new technologies or with greater labour mobility afforded by a recovery in housing market liquidity. Equally, changes to unemployment insurance could have encouraged more intensive job search by those out of work. Set against that, analysis by Bank staff suggests a decline in matching efficiency in the past two decades, suggesting balanced risks to our assessment that merit continued monitoring.
Secondly, when inflationary problems loomed in the past, inflation expectations – amongst businesses, households and in financial markets – increased, both signalling and bringing about the incipient rise in inflation. Today, we appear to enjoy well-anchored inflation expectations, which will affect price-setting behaviour in the ways I have touched on. Indeed, modern economic models of various kinds – inside and outside the Bank – tend to assume policy credibility, anchoring mediumterm expectations. If that were so, the medium-term outlook for inflation would be assured. In fact, credibility is not something that can just be assumed. It has to be achieved, and continually reachieved, by policymakers – through our actions, and reasoned explanations of them. For that reason alone, policy inevitably remains a judgmental process – not one mechanically tied to a particular model, but one that draws on a wide range of inputs, including the insights of our business contacts. Learning is, accordingly, inherent in our mission. Over the next few years, if the economy escapes being buffeted by shocks, we will learn quite a lot. In the meantime, notwithstanding the uncertainties, we have to make judgments and explain them.