positive, some negative. but i think it ’ s safe to say that, without the depreciation, inflation would be much closer to target. other things have also contributed the rise over the past year, notably the rise in oil prices. in may 2016, ahead of the gfk / ec measure of headline consumer confidence shown in the chart uses the balances published by the european commission ( which are seasonally adjusted, unlike the gfk data ), but applies the same methodology as the gfk measure ( which uses a different aggregation than the european commission ’ s ). all speeches are available online at www. bankofengland. co. uk / speeches the referendum and prior to sterling ’ s fall, the mpc ’ s central forecast for inflation in 2017q3 was below the 2 % target. the second point – how inflation would also have been lower had households been as pessimistic as the foreign exchange market – is harder to get across, because you have to simulate the behaviour of consumption. i ’ m going to try and do that with a simple economic model. we ’ ll imagine an economy that has two sectors – one third of it produces internationally tradable output, two thirds non - tradable stuff – between which capital and people can move costlessly. we ’ re going to hit the economy with negative news about the future. specifically, we ’ ll suppose that people suddenly learn that, three years hence, productivity in the tradable sector is going to start to fall ( relative to base ). to fix the numbers, we ’ ll scale the hit so as to produce a material decline in the fair value of the exchange rate – 10 %, say. given the other parameters in the model, this requires an anticipated and overall decline in labour productivity of around 8 % in the tradable sector, 5 % in the economy as a whole. the results of the simulation are shown in charts 9 ( a ) - ( h ). because the foreign exchange market fully and correctly anticipates the productivity hit the depreciation occurs immediately and does nothing further when productivity actually falls ( 9 ( b ) ). in the interim, the weaker currency provides a big fillip to the tradable sector. its sterling profits rise significantly and, for as long as productivity holds up, this encourages a significant expansion in investment, employment and output ( the green lines in 9 ( c ), ( d ) and ( g ) ). this

that either the fact or the nature of brexit should change those short - term estimates. if you accept the way macro - economists often think about aggregate supply, this view makes sense. typically, potential output is divided into a contribution from the stock of capital – how much physical capacity there is in the economy – and something called “ total factor productivity ”, or tfp. the stock of capital is much bigger than the flow of new investment that adds to it, and it therefore evolves relatively slowly. and, while tfp is a catch - all for all sorts of factors, many associate it with relatively slow - moving things like the state of technological knowledge or average educational attainment. on this basis it ’ s hard to see how the overall rate of potential output growth – and, a fortiori, our estimates of that trend – could change much over any short period of time. indeed, i think we can go further than this – not only can the view that changes in supply are gradual make sense in principle, i think it ’ s usually true empirically as well. over shorter - run cyclical horizons, most movements in economic growth appear driven by demand, not supply. that ’ s why inflation tends to be higher in upturns than downturns. but that doesn ’ t mean such short - term hits to productivity are inconceivable. we saw a sharp step down in productivity growth after the financial crisis. and i think there are things involved in brexit that, once one digs below the macro - economic surface, could potentially do the same. i ’ m thinking in particular of allocative effects. if eu withdrawal results in significant new barriers to trade between the uk and its major trading partners in the rest of europe, one plausible consequence would be a marked shift in relative demand for uk output. the economy would probably experience less demand for the things we ’ ve been exporting to the eu and more for uk - based substitutes for the goods and services we ’ ve tended to import. that wouldn ’ t matter much if the resources for one could be seamlessly and costlessly transferred to the other. in reality, however, those resources, human as well as physical, are likely to be specialised : they ’ re more productive in some areas than others. a plant used to produce a particular car part, as part of an integrated european supply chain, cannot suddenly be converted into one that makes a complex german all speeches are available online