And while I’m not yet worried that we face a major and serious risk in the opposite direction, I do think we need to adjust the policy settings we put in place to head off the downside risks to inflation identified in the immediate aftermath of the big financial shocks in late 2008 and early 2009. It is possible to describe this challenge in different ways – as a gradual “normalisation” of policy or a gradual withdrawal of policy stimulus. Words which I don’t think create the right  BIS Review 99/2010  9  impression in the current environment – particularly in relation to an upward move of Bank Rate from 0.5% to 0.75% – are “rate hike” or “tightening” of policy. “Rate hike” implies a sharp rise in interest rates, which is not what I favour. I favour a gradual rise in Bank Rate which would be aimed to avoid destabilising confidence through a sudden lurch in policy. “Tightening” may be technically correct as the opposite of “loosening” but it implies that monetary policy might become objectively tight and restrain the growth of the economy significantly. Again, that is not my view about the policy stance we currently need. So how should we characterise the current challenge in front of the MPC? The Bank Governor, Mervyn King, is fond of sporting analogies. But I have always been pretty useless at sport and my greatest interest outside of my working life is music, and in particular rock music.
UK inflation performance That brings me to the final area where the UK economy has performed very differently to expectations last summer – headline inflation. The UK has just experienced the second significant upward spike in inflation in the last couple of years. Since the beginning of 2008, when the financial crisis and the ensuing recession might have been expected to push down inflation, consumer price inflation in the UK has averaged 3% – above the 2% target and more than one percentage point higher than average CPI inflation in the pre-recession period of growth. Our inflation rate is clearly influenced by external factors in the world economy, such as a volatile oil price, and these have clearly made the control of inflation more difficult over the last two or three years. But if these global forces were solely to blame for higher inflation, they would be having a similar effect in other major economies. As Chart 6 shows, the US and the euro area have seen lower and more stable inflation over the last couple of years, with inflation averaging around 1¾% since the beginning of 2008. US inflation has recently been pushed up to over 2% by higher petrol prices, but to a much lesser extent than in the UK. 5  According to the Labour Force Survey measure, unemployment peaked at 11.9% in mid-1984 and 10.6% in early 1993. Approximately two years after the start of the recession in both cases, unemployment was 10.2% at end-1981 and 10.4% at end-1992.