we think the rate of growth of earnings in an underlying sense is probably around the 4 % level – higher than we saw before covid, and somewhat higher than we would expect to see in these economic conditions. but, there is another interesting development. the dispersion of pay growth has risen quite markedly – so for the high numbers we read about, there are also low ones. i am going to come back to this point. the final piece of the economic picture i want to cover is inflation. having been well below target last year and into this year, it has risen above rapidly, to 3. 2 % in august. much of the latest rise reflects base effects from last year, but we have also seen unusually strong rises in some items, including some foodstuffs, used cars and accommodation. our forecast in august had inflation rising to 4 % by the end of this year, and developments since then mean that inflation is likely to rise to slightly above 4 %. the major contributors to the further increase are not base effects but rather the strength we are now seeing in goods and energy prices. our view is that the price pressures will be transient – demand will shift back from goods to services, global supply the hard yards ‐ speech by andrew bailey | bank of england chains are likely to repair themselves, and many commodity prices have demonstrated mean reverting tendencies over time. but, the pressures are very much still with us, and there is still we believe pass - through to retail prices to come, and manufacturers ’ output prices are still rising rapidly. added to that is the uncertainty around how the labour market puzzle resolves itself, and how that will affect employment and earnings. meanwhile, just to remind, the recovery is weakening. a lot therefore turns on how effectively supply capacity is rebuilt and over what time, and how the labour market evolves. these are truly hard yards. for most of the rest of my time, i am going to turn to the setting of monetary policy. monetary and fiscal policy have operated independently but consistently – unsurprisingly i would emphasise – to provide the bridge through covid, supported i should add by the stability of the financial system and macroprudential policy. we have had to rely on asset purchases to do a lot of the work because of the proximity of interest rates to the lower bound. there is plenty of debate around qe, some parts of that debate are better founded than others. i am not going to cover that in

to reconcile these numbers, but to do so involves a lot of movement of people from furlough, unemployment and inactivity, in ways not so far seen. there are a number of possible outcomes to this puzzle, which have different implications for the labour market. the first is that the furloughed workers will largely be re - absorbed into their old jobs, and so even with a further reduction in unemployment and inactivity, we are left with an excess of job vacancies. if these excess vacancies are associated with shortages of workers in particular sectors, this may push up on wages. this could also happen if furloughed workers do not return to their old jobs, but are not suitable for those jobs and sectors where there are a high number of vacancies. in other words, there is a mismatch in the labour market. such an outcome is likely to raise the rate of unemployment consistent with stable wage growth i. e. the nairu. the second outcome is different. vacancies may be temporarily higher, and above their steady state level in the short - run, if firms are anticipating that it will be harder to find workers in the future when unemployment falls. in that scenario, demand picks up, the impact of matching frictions in the labour market dissipate over time, and both vacancies and unemployment fall. the nairu would be less affected in this scenario. another possible explanation is that the level of advertised vacancies is elevated due to employers overestimating the growth of demand to come just as the speed of the recovery falls off. in this case, some of the vacancies turn out not to be jobs as employers change their mind, or at least hiring is put back. the implications of these labour market outcomes are quite different for growth, inflation, and thus monetary policy, which illustrates the uncertainty we face. before turning to inflation, i want to say something on earnings. on the face of it, headline earnings are elevated. pay growth of around 8 % for july ( the latest available number ) is very high. but there are a couple of covid - related distortions that have been pushing up on this growth : there is a large base effect from the fall in average earnings last year, and a compositional effect from the pattern of impact of covid on activity across the economy and how that relates to typical pay rises by type of job [ 2 ]. all of that said,