Revisions to the official data and the volatility of measured productivity - reflecting the business cycle - make it extremely difficult to infer changes to long-term growth rates. The absence of any compelling evidence for a rise in underlying productivity growth suggests that this is an unlikely explanation for consistently low inflation over the past decade. Third, the new monetary policy framework - a symmetric inflation target and the transfer of interest rate decisions to an independent Bank of England - has helped to anchor inflation expectations to the target. It is less likely now that a shock to inflation would lead to a further and persistent deviation of inflation from target. There is a belief that inflation will soon return to target. As a result, a surprise movement in inflation is expected to be temporary and so less likely to lead employers and employees to adjust their desired prices and wages. And there is convincing evidence that changes to inflation are much less persistent under the new monetary policy arrangements. So there you have it: three possible explanations for the recent low and stable level of inflation despite falling unemployment and rapid output growth. But this is no time for complacency or hubris. Part of the improved short-run trade-off between growth and inflation may reflect temporary factors. Inflation may have been close to target because of one-off explanations, such as increased competition that temporarily depressed retail prices relative to costs, or larger flows of migrant workers that have temporarily held down wage inflation.
What is clear, however, is that the combination of low and stable inflation and continuously falling unemployment must come to an end at some point, and may already have done so. Starting, as we do now, with little if any spare capacity, it is unlikely that we can expect unemployment to fall indefinitely. From time to time shocks will hit our economy, as we have seen with oil prices and world trade, and so  2  BIS Review 61/2004  there will be fluctuations in growth and unemployment, as well as in inflation. Unemployment can be maintained at lower rates than in the past, even though there will inevitably be times when it will rise because no monetary policy can hope to prevent all fluctuations of demand, output, and hence employment. The nice decade we might expect to be followed by the not-so-bad decade.1 Moving from a nice to a not-so-bad decade would still represent a significant improvement in our economic fortunes compared with the period of high inflation. We must be conscious of the dangers of hubris. After all, starting from the Garden of Eden there can be only a fall from grace. ENDS  1  For those looking for a suitable acronym let me suggest that the degree of stability to which we can reasonably aspire, in comparison with the nice decade, will be not of the same order but also desirable, or not-so-bad. BIS Review 61/2004  3