example, the latest cbi survey shows 62 % of manufacturers reporting some spare capacity – which is virtually in line with the average for the decade before the financial crisis. 6 the evidence on wages and prices is also consistent with the view that spare capacity is not exerting as much downward pressure on inflation as the mpc expected last summer. in the manufacturing sector, underlying wage growth is back up to the 4 – 5 % level already, though is more subdued in the services sector. and after quite widespread pay freezes last year, the latest pay settlements data from income data services show that the most popular range for pay settlements is currently 2 – 3 %, which is where four out of ten pay settlements are now being struck. if the recovery continues and headline inflation remains relatively high, there may be a further upward drift in pay growth in the private sector, offsetting some of the downward pressure on wage growth from the public sector. uk inflation performance that brings me to the final area where the uk economy has performed very differently to expectations last summer – headline inflation. the uk has just experienced the second significant upward spike in inflation in the last couple of years. since the beginning of 2008, when the financial crisis and the ensuing recession might have been expected to push down inflation, consumer price inflation in the uk has averaged 3 % – above the 2 % target and more than one percentage point higher than average cpi inflation in the pre - recession period of growth. our inflation rate is clearly influenced by external factors in the world economy, such as a volatile oil price, and these have clearly made the control of inflation more difficult over the last two or three years. but if these global forces were solely to blame for higher inflation, they would be having a similar effect in other major economies. as chart 6 shows, the us and the euro area have seen lower and more stable inflation over the last couple of years, with inflation averaging around 1¾ % since the beginning of 2008. us inflation has recently been pushed up to over 2 % by higher petrol prices, but to a much lesser extent than in the uk. according to the labour force survey measure, unemployment peaked at 11. 9 % in mid - 1984 and 10. 6 % in early 1993. approximately two years after the start of the recession in both cases, unemployment was 10. 2 % at end - 1981 and 10. 4 % at end - 1992. in the april 2010 quarterly industrial trends survey, 62 % of manufacturers reported that they were working

that direction. rather, the economic data last summer were telling us how sharply the economy had contracted in late 2008 and the first half of 2009 both at home and abroad, and how sharply unemployment had risen as a result. a strong theme underpinning the analysis of both the may and august inflation reports last year was that uk inflation was expected to be pushed significantly below target by a large margin of spare capacity. these reports showed fan charts in which inflation was much more likely to be below the target than above it throughout the two to three year horizon over which the bank produces its forecasts. the central projection in both inflation reports we produced last summer suggested inflation would fall to around 1 % or just above in the first half of 2011 and to struggle to return to the target after that. this was the economic backdrop against which i and other members of the mpc took the key decisions to put in place the monetary policy settings which we currently have in place today : sharp falls in demand and rises in unemployment ; great uncertainty about recovery prospects ; and a general expectation of persistent below target inflation. the bank was not alone in its prognosis – this was the general view of the forecasting consensus last summer. a year on, however, the economic situation has changed. there are still many uncertainties about future economic prospects. but there are four features of the current position of the economy which are now very different from the situation we faced last summer – the world economy has bounced back, the uk economy is also recovering, the margin of spare capacity does not appear to be as large as we had expected a year ago, and inflation has run above target rather than falling below it. before moving on to talk about monetary policy, i will briefly discuss these four factors in turn. recovery in the world economy over the past year or so, the world economy has bounced back strongly, led by growth in asia but also supported by recovery in the us and a more gradual turnaround in the european economy. consensus forecasts for 2010 growth in the three main regions of the world economy have improved significantly over the last twelve months, as chart 1 shows. the us economy is now projected to grow by over 3 % this year, and gdp in japan is also projected to rise at a similar rate – very strong by comparison with its recent poor growth performance. true, the european economies appear to be lagging behind in this global recovery. but even is this region of the world economy, the growth outlook has improved compared with