On the nominal side, UK inflation had fallen from a peak of 5.2% in September 2011 to 2.9% in June 2013 (Chart 2a), as upward pressures from the past exchange rate depreciation (and higher energy prices) eased. Domestic inflationary pressures were subdued, with annual pay growth running around 1% (Chart 2b) – far below its pre-crisis average rate of 4%. Chart 2: Headline CPI inflation elevated but domestic inflationary pressures subdued a) CPI inflation Percentage changes on a year earlier 6 5  Headline CPI  4 3 2 2% target 1  Core CPI  0 2006  2007  2008  2009  2010  2011  2012  2013  5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  b) Whole economy regular pay growth Percent 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2006  2007  2008  2009  2010  2011  2012  2013  With output only having just returned to its pre-crisis peak and unemployment still several percentage points above any reasonable estimates of its equilibrium rate, the MPC judged that there was a large amount of spare capacity in the UK economy, and significant scope for aggregate demand to increase consistent with inflation returning sustainably to the 2% target. But the exact extent of slack was more uncertain than usual. Productivity had fallen alongside activity during the recession, and its reported growth had been anaemic since, averaging around half its pre-crisis rate (Chart 3).
In the extreme, this risks undermining trust in monetary policy makers and the constituency for operational independence. Again, it bears remembering that distributional considerations are rightly the responsibility of governments not of independent technocratic monetary policy committees that are narrowly mandated to achieve price stability. In the event, Bank of England research shows that income and wealth inequality has been stable in the UK since the early 1990s, and fell in the years after the crisis when the MPC used unconventional policies. Those who gained least from the higher asset prices that resulted from the MPC’s asset purchases gained more from its broader effects supporting jobs and activity. 38 Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy easing in response to the crisis measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £ per worker per year, and 1.5 million more people would have been out of work.39  See ‘Renewal of the Inflation-Control Target: Background Information – October 2016’, Bank of Canada. See Bunn, P, Pugh, A and Yeates, C (2018) ‘The distributional impact of monetary policy easing in the UK between 2008 and 2014’, Bank of England Staff Working Paper No. 720. 39 See ‘The Spectre of Monetarism’, Roscoe Lecture given by Mark Carney at Liverpool John Moores University, 5 December 2016.