In the labour market, this implies taking a view on what influences the relative bargaining power of employees and employers. Candidates include: the evolution of unemployment (perhaps relative to some equilibrium measure of unemployment);[26] the extent of mismatch in the labour market (as reflected in measures like the ratio of vacancies to unemployment);[27] and the pace of churn in the labour (captured in measures of hiring and vacancies). In goods markets, the relative bargaining power of firms along value chains will be influenced by factors such as: the strength of demand and thus corporate pricing power; the intensity of competition among firms; the barriers to entry and exit from specific market segments; and the regulatory regime. Monetary policy makers need to form judgments on the relative importance of each factor and thus take a view about how they influence the responsiveness of intrinsic inflation persistence to monetary policy actions. These issues therefore lie at the heart of current MPC discussions. Indicators of inflation persistence While I have emphasised the importance of constructing a behavioural story in forming judgements about inflation persistence, in practice real time assessments will rely on how the data flow is interpreted against those judgements. At its March meeting, the MPC again identified the tightness of the labour market, the strength of wage developments and the momentum in service price inflation as the key indicators it uses to assess the magnitude and evolution of inflation persistence, on which it has placed considerable weight in taking monetary policy decisions.
This is what creates the potential for the ‘second round effects’ that seek to avoid the real cost of higher energy prices to sustain above target inflation even as the original impulse to headline inflation from the direct effect of higher energy prices on household utility bills recedes. [24] In other words, the level of energy prices is likely to have implications for how much intrinsic inflation persistence exists in the aftermath of an energy price shock. If a rise in energy prices in seen as permanent, it is more likely to trigger greater intrinsic inflation persistence. And the greater the proportion of any energy price rise that is seen as being lasting rather than temporary, the greater the intrinsic inflation persistence that is likely to follow. Page 9  Making assessments of this type is particularly important at present. Headline inflation is set to fall sharply in the coming months, both because the big contributions from energy price rises last year will drop out of the annual calculation and because wholesale gas prices have reverted of late. But the level of energy prices remains well above pre-pandemic levels, so the scope for some sustained momentum in inflation stemming from greater intrinsic inflation persistence exists.