That in turn may lead them to set higher wages and prices to compensate and thus to the elevated level of inflation persisting. Measures of inflation expectations for the year ahead, for both households and businesses, have moved upwards, though no more than one would expect given the outlook for inflation (Chart 11). Measures of inflation expectations further ahead, which might be more indicative of a fundamental shift in perceptions of the inflation climate, have though mostly remained well anchored (Chart 12). But this is something we are watching closely, in particular for any signs that higher inflation expectations are leading businesses to raise pay and prices. There are elements of all these mechanisms present in our latest projections, but there is a risk that they will turn out to be more powerful than in our central view. And, as noted earlier, there is the risk of further increases in the prices of commodities, especially that of oil. Certainly, my own judgment is that, if anything, inflation may prove a little more persistent next year than presently embodied in our projections. 7  This is sometimes referred to as the “battle of the mark-ups” in the unemployment literature; see e.g. P. R. G. Layard, S. J. Nickell and R. Jackman (1991), Unemployment: Macroeconomic Performance and the Labour Market. 6  BIS central bankers’ speeches  On its own, that might appear to imply that Bank Rate needs to rise faster than implied by the market yield curve that underpins our projections.
But even abstracting from the snow, activity seems to be have been broadly flat. How much should we read into that? One possibility is that the figure is simply erratic or will be revised away in due course. But other indicators – particularly some measures of consumer and business confidence – also weakened during the second half of the year,  3  While some outside commentators regarded that projection as being on the optimistic side, it would still have left output below its pre-crisis level until 2011 Q4 and broadly in-line with the average experience after banking crises recorded by the IMF (Chart 1). 2  BIS central bankers’ speeches  suggesting that something more substantial may have occurred. It could just be a short-lived soft patch – after all, recoveries are rarely smooth. Indeed, that is the judgement incorporated in the projections we published a couple of weeks ago (Chart 2). But it could instead be the harbinger of a more durable slowing – only time will tell. Let me now turn to the sources of the recent elevated inflation and the chances of inflation remaining above our 2% target into the medium term and beyond. A year ago, in our February 2010 Report, our central expectation was that inflation would be around 1% in the first quarter of this year. Yet in January, CPI inflation reached 4% and is likely to move higher in the coming months, in part reflecting the recent surge in oil prices.