But there are grounds to continue to suspect that labour supply may be behaving differently to the past, to be cautious about moving to tighten monetary policy on the basis of falling unemployment alone and to wait for clearer signs of strength in pay growth. Even after adjusting for one off effects, pay growth is currently still some 2 percentage points below the pace consistent with achieving the inflation target in the medium term. That weakness in pay might go some way in explaining why inflation has been undershooting the MPC’s predictions of late. The instinct to be cautious about tightening monetary policy too early is further reinforced by the constraints that come with Bank Rate remaining close to its effective lower bound. We’ve now seen evidence of a slowing in UK growth, and prospects for the global economy have deteriorated. With the scope for tightening monetary policy substantial, but the scope for loosening it much more limited, the risk of a surprising pick-up in inflationary pressure may be more manageable than the risk of the expansion stalling and inflation dropping further. The latter risk, of course, has and will continue to become less acute the longer the expansion continues. But it remains, for me at least, a concern. Uncertainty remains, old puzzles are unresolved and new ones appear. That is the normal world of the forward looking monetary policy maker.
And unemployment has continued to come down at a much faster pace than was expected, dropping from 7.6% in the data that came out when I arrived in the Bank last November, to 6.0% in the latest data – a rate of decline not seen since the late 1980s. Around half a million people have been taken out of unemployment. That has to be good news. But, as always in economics, there is a cloud to the silver lining. Output has grown strongly over the past year but unemployment has dropped faster than output has grown. So though the UK economy is producing more, it is using even more  2  BIS central bankers’ speeches  people to produce it. In other words, productivity growth has not made even the modest recovery to 1%, half of its pre-crisis trend, that we forecast last November. It was negative over last year and has achieved only 0.5% growth over the past 4-quarters. This is around half the pace the MPC had expected, though it picked up a bit in the latest quarter. And, needless to say, the productivity puzzle remains a puzzle. Upward revisions to the official data for the immediate post crisis years have reduced the size of the puzzle a bit. But the level of UK productivity is 14% down relative to pre-crisis trend. So with productivity recovering very slowly and still growing well below the pre-crisis trend, it is looking less and less likely that that “lost” productivity will be recovered any time soon.