This is around 0.2 percentage points higher than forecast in the Bank’s May Inflation Report. This pick-up in wage growth is welcome. Indeed, this rise is a necessary ingredient for getting inflation back to target in the period ahead. Equally, were wage inflation to continue to surprise to the upside as the labour market tightens, this could pose an upside risk to inflation, with corresponding implications for the MPC’s monetary policy stance. 8  8  See Bunn and Rostom (forthcoming). BIS central bankers’ speeches  It is important also, however, to place this wage news in context. This most recent upside surprise comes against a backdrop of wage growth having surprised to the downside for much of the past two years. Up until last month, wages had surprised to the downside in 11 of the past 18 months. That has left the level of regular pay in the economy 2% lower than we expected 18 months ago, even with the recent news. Second, one explanation for the recent weakness of wages has been the compositional effects of a greater number of lower-skilled, lower-paid workers entering the job market. This has clearly had some, probably temporary, depressing effect on wage growth. Over the postcrisis period as a whole, however, compositional effects have not depressed wages. Rather, they have inflated them. Without composition effects, the level of wages today would be around 1% lower, not higher.
Large recessions are significantly more likely than, for example, the normal (or bell) curve might lead us to expect. Based on historical data, the probability of a recession (defined here as a negative rate of annual GDP growth) over the following year lies between 17% (taking cross-country evidence since 1870) and 30% (if we take the UK since 1700). In other words, a recession should be expected one in roughly every 3 to 6 years. Of course, the distant past might be a poor guide to the future. But even if we took the period since 1945, the probability of recession would only fall to 12%, or one year in around every 10. These are probabilities over a one year horizon. In practice, what matters for spending and saving are people’s risk perceptions over a longer-term horizon. By making some assumptions about how these probabilities evolve over time, it is possible to construct cumulative probabilities of recession. Chart 11 shows the cumulative probabilities of recession over a ten year horizon using two long-run cross-country GDP samples. 5 Over the course of a decade, the risk of experiencing at least one recession rises steadily, reaching between 85–90% after ten years. Using post-war data, this cumulative probability is just less than 80%. So over any plausible sample period, a recession remains considerably more likely than not over the course of a decade. 6 That is not to say longer periods of interrupted growth are impossible.