If some weight is given to the final two explanations, the risks to future wage growth and inflation would be skewed to the downside, not only in the short-term but at longer horizons too.11 (b)  Inflation expectations  Chart 18: Projection for wage growth and inflation, assuming a starting level of slack of 2%  Percentage change oya  6 4 2 0 -2 -4  Wages - February IR projections Wages - more slack Inflation - February IR projections Inflation - more slack  A complementary explanation for the wage puzzle, which goes in the same Source: ONS and Bank calculations. direction, is that inflation expectations have shifted downwards. To the extent these weaker expectations shape firms’ wagebargaining and price-setting behaviour, this would impart downwards persistence into wage and inflation dynamics. There is an array of inflation expectations measures covering different sectors – households, companies, financial markets – and horizons – short and longer term. All of these measures have fallen over the course of the past two years, as actual inflation has fallen, though often by differing amounts. Among households, one-year-ahead inflation expectations, as reported by Citigroup, have fallen by 120bp over the past year. At the five to ten year horizon, they have fallen by around 30bp (Chart 19). Shorter-term expectations are around 1.5 percentage points, and longerterm expectations around 1 percentage point, below their pre-crisis averages.

On the MPC’s central view, inflation will remain close to zero in the near-term, before rising to reach the inflation target over a two-year horizon. The risks to inflation at that horizon are plainly two-sided. But my personal view is that these risks are skewed to the downside. In my view, that means policy needs to stand ready to move off either foot in the period ahead to meet the symmetric inflation target. Thank you. References Ball, L (2006), “Has Globalisation Changed Inflation”, NBER Working Paper 12687. Bank of England (2015a), “Agents summary of business conditions”, February 2015, available at: http://www.bankofengland.co.uk/publications/Documents/agentssummary/2015/feb.pdf. Bank of England (2015b), “Letter from the Governor to the Chancellor”, available at http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/cpiletter120215.pdf. Bell, D and Blanchflower, D (2011), “Underemployment in the UK in the Great Recession”, National Institute Economic Review No. 215. Bell, D and Blanchflower, D (2013), “Underemployment in the UK Revisited”, National Institute Economic Review No. 224. Bernanke, B (2006), “Global economic integration: what’s new and what’s not?”, remarks at the Federal Reserve Bank of Kansas City’s Thirtieth Annual Economic Symposium, Jackson Hole, available at: www.federalreserve.gov/boarddocs/speeches/2006/20060825/default.htm. BIS (2014), “Inflation: domestic and global drivers”, BIS 84th Annual Report page 49 onwards. Borio, C and Filardo, A (2013), “Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation”, BIS Working paper, No. 227. Broadbent, B (2014), “Unemployment and the conduct of monetary policy in the UK”, speech given a the Federal Reserve Bank of Kansas City 28th Economic Symposium, Jackson Hole, available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech752.pdf.