quarterly national accounts ( graph 1 ). the top panel shows the level of household disposable income, and household consumption spending. income as shown here takes account of taxes, transfers and household interest payments. both series bis central bankers ’ speeches are measured in real per capita terms, and shown on a log scale. in the lower panel is the gross household saving ratio, which is of course the difference between the other two lines expressed as a share of income. 2 also shown is a trend line for each of the income and consumption series, estimated using ordinary least squares, over the period 1995 – 2005. the trend is then extrapolated for the 21 quarters since the end of 2005. notice that the trend growth for real per capita household income over the period 1995 to 2005 was 2. 0 per cent per annum. that ’ s a pretty respectable rate of growth for an advanced country. it was more than double the growth rate seen in the preceding two decades from 1975 to 1995. growth at that pace means that the average real income doubles about every 35 years. notice also that the trend line for consumption was steeper than that for income over the same period. these two lines were on their way to meeting. real per capita consumption growth averaged 2. 8 per cent per annum. this was a full percentage point higher than in the preceding ten - year period, and similar to the sorts of per capita growth rates for consumption seen in the late 1960s and early 1970s. for ten years up to 2005, then, consumption growth outpaced income growth, which was itself pretty solid, by three - quarters of a percentage point, on average, every year. in fact this convergence of income and consumption was the continuation of a trend that had already been in place for about a decade. as the bottom panel shows, the flow of saving fell as a share of income. as you can see, things began to change after that. from about 2006, real per capita income began to grow faster. over the five years to the end of 2010, it rose by 2. 9 per cent per annum. it may not be entirely coincidental that that period is when the terms of trade really began to rise in earnest. yet from about the end of 2007, even as income was speeding up, household consumption spending slowed down. in per capita terms, real consumption today is no higher than three years ago. it ’ s no wonder that people are talking about consumer caution, and no wonder that retailers are

of the advanced economies are currently operating well below full capacity and, given the subdued nature of the recovery, it is likely to be some time before this excess capacity is wound back. one consequence is that, provided inflation expectations remain well anchored, official interest rates in these economies – which are currently at historically low levels – are likely to remain below average for a considerable period of time ( graph 5 ). in contrast, elsewhere, including in asia and australia where growth is stronger, interest rates are likely to be relatively higher. this interest differential is likely to lead to a flow of capital from the major advanced economies to asia and other better - performing areas of the world. graph 5 g7 – average policy rate % % sources : federal reserve bank of new york ; global financial data ; thomson reuters in asia, concerns are already emerging about the implications of this. in particular, some countries are worried about the potential for volatile capital flows to be destabilising for their economies. the concern is that capital inflows in the near term will later turn into capital outflows when interest rates in the advanced economies do eventually normalise, and that this could be disruptive. as a way of insuring themselves against this risk, some central banks continue to accumulate foreign reserves. a number of countries in the region are also concerned about the effects of capital inflows on their domestic banking systems, with some having taken steps to rein in bank lending growth, particularly in cases where property prices are increasing strongly. a related consideration is the effect of these capital flows on exchange rates in the region. in general, there is considerably less tolerance for large movements in exchange rates in many of these countries than there is in australia. in our own case, movements in the value of the australian dollar are largely seen to be a stabilising force for the economy. there is also a general acceptance of the view that, over the next few years, our real exchange rate is likely to be higher than the average over the past decade or so. in contrast, in much of asia, where international trade shares are considerably higher than in australia, movements in exchange rates tend to be viewed with more concern, particularly when they are seen to be driven by speculative capital flows. one other related consideration is the impact on asset markets around the world of an extended period of low official interest rates in the major advanced economies. when the global economy was in this situation around five years ago things did not work out well. while the current