Chart 6a: Shipping costs have fallen steeply in recent months May 2020 = 100  Freightos Baltic Container Index 1000  1000 Harpex Charter Rates Index  800  800  Baltic Exchange Dry Index  600  600  400  400  200  200  0 May 20  0  Sep 20  Jan 21  May 21  Sep 21  Jan 22  May 22  Sep 22  Source: Refinitiv, Baltic Exchange, Freightos Baltic Index (https://fbx.freightos.com), Harper Petersen and Bank calculations. Bank of England  Page 12  Chart 6b: Inflation in prices of cars and computers has also turned out to be transitory  35 30 25 20 15 10 5 0 -5 -10 -15 2017  2018  2019  Annual inflation; per cent 35 30 25 Second-hand cars 20 15 10 5 0 -5 Computers -10 -15 2020 2021 2022  ‘Computers’ refers to ONS code for ‘data processing equipment’. Source: ONS and Bank calculations. However, there was always the risk that big rises in traded goods prices might prompt faster inflation in its more persistent, domestic components, including nominal wages. This would have a bigger impact on forecasts of inflation at policy-relevant horizons and clearly merit a response. In gauging the potential strength of these “second-round effects”, how much did we have to go on? Not much, is the answer. As we saw earlier, import (and therefore consumer) prices have risen much faster than those of output.
Yet there was almost no perceptible response of nominal pay and domestic prices. Economists attributed this decline either to the change in monetary regime itself, or – more often – to greater flexibility in the labour market. Chart 7: Lower sensitivity of wages to real income shocks during inflation targeting period  Rolling coefficient on wedge between consumer and output prices using 18-year regressions. Dotted line shows coefficient estimated by Layard, Nickell and Jackman (LNJ) on 1956-85 sample. Source: Layard, Nickell and Jackman (1991), ONS and Bank calculations. But it was hard to be confident about these estimates. Labour-market flexibility isn’t set in stone. In a speech in 20066, Charlie Bean suggested that increased ease of migration, in both directions, might have reduced the sensitivity of real wages to shifts in labour demand. It’s possible that, by adding a degree of friction to  5 Layard, Nickell & Jackman (1991), ‘Unemployment: Macroeconomic Performance and the Labour Market’. 6 Bean (2006), ‘Globalisation and Inflation’. Bank of England  Page 14  the inflow and outflow of migrant workers, the combination of Brexit and the pandemic have made the labour market less adaptable than it was a few years ago. There may be other reasons why susceptibility to second-round effects can vary. During the one period in which higher import prices seriously impinged on real incomes, following the financial crisis, unemployment was also much higher than it is today.