And, as I discussed earlier, the puzzle about the apparent weak feed through from demand to inflation is reduced somewhat by the Committee’s judgment that the performance of the labour market improved over recent years. That leaves continuing demand pressures likely to feed through to inflation, looking ahead. With monetary policy needing to be set on a medium-term view, overall I concluded at the MPC’s latest meeting that our interest rate should be increased by 25 basis points – a small tweak to reflect the outlook. But, as my remarks today have emphasised, there are considerable uncertainties. Two final thoughts about them. The first concerns the precision with which any monetary authority can achieve its objective. In the bad old days, it should probably have been clear when the economy was experiencing unsustainable excess demand. In today’s world, when we discuss excess or deficient demand we are generally addressing much smaller deviations from trend than in the past, as Chart 19 suggests. In consequence, our debates about cyclical conditions lie well within the margin of error of any sensible estimate of underlying trends – especially given uncertainty about the structural changes affecting the economy. In a similar vein, we – and commentators – need to keep some perspective about deviations from the inflation target. In November, the year-on-year measure of CPI inflation was 1.1%. By January it was 1.6%.

Spread of effect ive personal loan rat e rat es over Bank of England repo rat e  12  BIS Review 16/2005  Chart 11: Composition of UK PNFC sector gross debt Ot her debt Securit ies ot her t han shares Borrowing from non-UK resident MFIs Borrowing from UK resident MFIs  Per cent 120 100 80 60 40 20 0  1990  1992  1994  1996  1998  2000  2002  2004  Chart 12: Corporate credit spreads  Basis points  Basis points  1000  300  High yield (lhs)  800  250 200  600  BBB (rhs) 400 200 0 2000  150  AA (rhs)  100 50  AAA (rhs)  0 2001  2002  2003  2004  2005  Source: M errill Ly nch Op tion-adjusted corp orate bond sp reads  BIS Review 16/2005  13  Chart 13: Share of world imports in world GDP  1995 = 1 1.5 1.2 0.9 0.6 0.3 0.0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003  Source: UN (pre-1980); IMF WEO Summer 2004 database (post-1980)  Chart 14: Import shares in consumption and business investment expenditures  Per cent 45 40 35 30  Business investment  25 20 15  Consumption  10 5 1970  1975  1980  1985  1990  1995  2000  Table 3: Value of sales over the internet by UK non-financial sectors  £  2002 2003  Households Business-to- Total business 6.4 11.4  12.7 28.2  19.0 39.5  Source: ONS  14  BIS Review 16/2005  Chart 15: Distribution sector profits (margins)  Percentage of output at basic prices 25.0  Retail 20.0  Total distribution sector  15.0  Wholesale  10.0 5.0 0.0  1992  1994  1996  1998  2000  2002  Chart 16: Output price inflation and CPI goods price inflation  Percentage change on a year earlier 4.0 3.0  Producer output prices  2.0 1.0 0.0 -1.0  CPI goods  1997  BIS Review 16/2005  1998  1999  2000  2001  2002  2003  2004  -2.0 -3.0 2005  15  Chart 17: Domestically produced manufactured goods: costs and prices  Percentage change on a year earlier  Percentage changes on a year earlier 8.0 Input prices (lhs)  15.0 10.0  Unit wage costs (rhs)  6.0 4.0  5.0  2.0 0.0  0.0  -2.0  -5.0  -4.0 -10.0  Output prices (rhs)  -6.0  -15.0 1996 1997 1998 1999 2000 2001 2002 2003 2004  -8.0  Chart 18: Private sector productivity  Percentage changes on a year earlier 5.0  Per hour  4.0  Per head 3.0 2.0 1.0  Per job  0.0 1995  1997  1999  2001  2003  Source: LFS, workforce jobs dat a and Bank  16  BIS Review 16/2005  Chart 19: Private sector factor utilisation (based on production functions)  Elasticity of Substitution = 0.5 Elasticity of Substitution = 1  1986  1990  1994  Percentage deviation of output from trend 8 6 4 2 0 -2 -4 -6 -8 1998  2002  Source: Bank calculat ions.