. bis central bankers ’ speeches graph 12 taking all these indicators together, it seems pretty clear that something has changed in the behaviour of households. it is likely that part of this change reflects the completion of the structural adjustment to lower interest rates and innovation in the financial system. but recently, there also appears to have been a change in attitudes. as was discussed in the smp, an important factor shaping the outlook is how persistent this change in attitudes turns out to be. on the one hand, it is plausible that consumption growth will strengthen considerably over the period ahead, supported by strong income growth and an unemployment rate that is trending down. on the other hand, this more cautious approach to spending could be quite long lasting, with households using the strong income growth to further improve their balance sheets. in putting together our forecasts, we have assumed a middle path, with the saving rate staying high, but consumption growth broadly matching income growth over the next couple of years. we will, of course, be looking very closely to see if this is how things evolve. before talking about the forecasts in more detail, i would like to draw your attention to one of the side effects of the recent subdued growth in retail spending. and that is the downward pressure on the prices of many retail goods. over the past year, the abs ’ s price index for clothing has fallen by 6 per cent ( graph 13 ). the price index for major household appliances has fallen by 4 per cent. the price index for furniture and furnishings has fallen by 1½ per cent and the price index for audio, visual and computing equipment has fallen by 18 per cent. in fact, there are very few ( non - food manufactured ) goods in the cpi whose prices have increased over the past year. bis central bankers ’ speeches graph 13 these pervasive price declines follow a substantial appreciation of the exchange rate and tariff cuts on a range of goods in early 2010. while it is difficult to be definitive, it is possible that the weak consumer spending has led to faster pass - through of these changes than suggested by previous experience. there has also been some moderation in inflation for goods and services whose prices are not directly influenced by the exchange rate, although the effects have been smaller. overall, over 2010 the cpi increased by 2. 7 per cent, with underlying measures of inflation running at about 2¼ per cent. updated forecasts i would now like to turn briefly to the bank ’ s updated forecasts. our central scenario

in relative prices is also occurring against the backdrop of ongoing stimulatory monetary policy around the world, including in asia. while in most countries, domestically sourced inflationary pressures remain subdued, there is an important global factor coming from the capacity constraints in commodity markets. at least for the time being, it would appear that the ability of the world to produce commodities is becoming a key constraint on non - inflationary growth for the global economy. as the governor said last week at the parliamentary hearing, managing these price pressures in commodity markets is shaping up as one of the major international issues of 2011. in asia, the high food prices, in particular, have meant that headline inflation rates have risen and there has been a lift in inflation expectations in some countries. if these inflationary pressures were to intensify, a stronger policy response than seen to date would be likely, increasing the risk of a subsequent sharp slowdown in the region. consumer restraint the second issue that i would like to talk about is the restraint in consumer spending and borrowing. as many retailers will attest, consumer spending has been subdued in recent times. you can clearly see this in the household saving ratio ( graph 8 ). while there are a whole host of measurement qualifications, the current data show that the saving ratio has increased from a see lowe ( 2010 ), “ the development of asia : risk and returns for australia ”, speech to natstats 2010 conference, sydney, 16 september and, lowe ( 2009 ) “ the growth of asia and some implications for australia ”, speech to citi australia inaugural australian investment conference, sydney, 19 october. bis central bankers ’ speeches little below zero in the first half of the 2000s to around 10 per cent in 2010. this increase has reversed the steady decline that took place over the previous two decades. graph 8 with the benefit of hindsight, a change in the trend looks to have started in the middle of 2000s, although, at the time, this was difficult to detect. over the decade to 2005, there was a large run - up in household debt and asset prices, and a decline in saving, as households adjusted to lower nominal interest rates and innovation in the financial system. it is plausible that this adjustment was largely completed by the mid 2000s and that since then, household spending patterns have returned to more traditional norms. over the past few years, this change has been reinforced by the global financial crisis which has led some households to rethink their spending and borrowing decisions,