Third, increasing cost pressures have made it more difficult to sustain profit margins without raising prices. Energy and import prices are one source of higher costs. Another is the cost of employing labour which has been rising faster than the growth of real take-home pay. Higher pension costs for  BIS Review 9/2007  1  companies, on the one hand, and higher taxes, petrol and utility prices for employees, on the other, have opened up a gap between increases in the pay bill and real take-home pay. If investment and employment growth are to be maintained, the burden of these higher costs must either be passed back in the form of reduced input costs or forward as higher prices. So far, pay pressures have been subdued, but not sufficiently so to mitigate the rise in costs to employers. As a result, companies have scaled back their demand for labour and looked to raise prices. The risks to money spending, inflation expectations and cost pressures were not overlooked by the MPC and were explicitly identified as upside risks to inflation both in speeches and in our monthly minutes back in 2005. In the event, the upside risks to inflation did materialise to some extent. And a year ago, the MPC thought the risks to GDP growth were on the downside. Yet, the total output of the UK, leaving to one side the energy sector, has been rising at an annual rate of over 3%.
But the continued relative decline of manufacturing – and indeed the strength of sterling – over the past decade or so reflects, not the stance of monetary policy, but the remarkable wind of change that has blown across the world economy with the advent of China, India and much of the former Soviet Union into the world trading system. To their great credit, business people and politicians have not resisted changes to the structure of the British economy, unlike many of their counterparts abroad. As a result, total output and employment here have grown rapidly, and our living standards are higher than could have been sustained with policies aimed to defend the old industrial structure. Those changes, however, have led to the closure of many manufacturing companies. There are over a million fewer people employed in manufacturing now than a decade ago, and 200,000 fewer in the West Midlands. It is just over a hundred years since car production started at Longbridge, just over thirty years since it was nationalised, and no vehicle has been built there for over a year. But there are also many success stories. Since I became Governor, I have made regular monthly visits to the regions and countries of the United Kingdom, and visited around one hundred companies, large and small, new and old.