unfortunately, this is only available from january 2000, so observations of quarterly average pay growth begin in 2000 q2. the last observation is 2015 q3. unemployment is measured by the quarterly average of the lfs unemployment rate. inflation expectations are measured using general public inflation expectations measures taken from the barclays basix index. variations on this simple specification are also estimated. first, annual spot inflation, lagged one quarter, is used to replace the inflation expectations. that is on account of the strong collinearity between survey measures of household inflation expectations and actual inflation outturns. second, the bank of england ’ s agents ’ scores for recruitment difficulties are included as an additional gauge of labour market frictions, which could reflect the ease or otherwise of labour market matching, and which are not captured by contemporaneous measures of headline unemployment. third, productivity growth ( in heads ) is included as an additional explanatory variable. table a1 contains the estimation results. the model in column ( 1 ) of the table contains a very simple wage phillips curve ( wpc ), relating pay to its lag and to unemployment. the wpc slope of around unity is highly statistically significant and the simple model explains around 40 % of the variation in wage growth. column ( 2 ) adds lagged inflation as a crude measure of inflation expectations, and column ( 3 ) further adds the recruitment difficulties measure. both enter with the expected sign and indicate that a 1 percentage point rise in inflation or a 1 - point rise in the agents ’ score would tend to correlate with rises in wage growth of between ½ and ¾ percentage point. the coefficient on unemployment remains at around unity. columns ( 4 ) and ( 5 ) add measures of inflation expectations. relative to ( 3 ), the inflation expectations measure in model ( 4 ) adds little explanatory power and enters with the “ wrong ” sign, possibly indicating multicollinearity. dropping inflation, in column ( 5 ), restores a role for inflation expectations with the expected sign. model ( 5 ) has overall marginally less explanatory power than model ( 3 ). columns ( 6 ) and ( 7 ) add productivity growth to the model. in moving from model ( 4 ) to ( 6 ), there is a small increment in explanatory power, and productivity growth enters significantly, although the coefficient on recruitment difficulties falls and is now estimated less precisely. inflation expectations continue to enter with the “

are guides to monetary policy decisions, but there are no magic thresholds. 23 this journey doesn ’ t have a set timetable ; only an expected direction of travel. in my opinion, we need to see cumulative progress in these three areas to have reasonable confidence that inflation is on track to return to the target and that a modest tightening in monetary policy will be necessary to ensure it does so sustainably. this means : sustained momentum relative to trend ; domestic cost growth resuming a path consistent with headline inflation at 2 % ; and core inflation measures moving notably towards the target. it is clear to me that, since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy. the world is weaker and uk growth has slowed. due to the oil price collapse, inflation has fallen further and will likely remain very low for longer. this may mean modestly weaker cost growth through this year, with the likely path for inflation, both headline and core, softer as a result. in short, recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise. in economic parlance, they are elements of a reaction function. one can think of a reaction function as akin to guide or policy rule relating the policy instrument to a set of macroeconomic variables. these are usually evaluated with respect to an “ objective function ” containing the policymaker ’ s target variables. for example, a flexible inflation targeting regime would be consistent with an objective function containing the deviation of inflation from its target and the deviation of a measure or measures of real activity from their equilibrium levels, weighted according to the policymaker ’ s preferences for stabilising one at the cost of another. the reaction function approach is arguably more robust to uncertainty about the structure of the economy than alternatives that seek to characterise policy by the first - order conditions of the policymaker ’ s objective function, although that robustness comes at the cost of not being formally the ‘ best ’ rule for a given model structure. see for example levin and williams ( 2003 ). bis central bankers ’ speeches it has always been the case that, because the economy is subject to unforeseen disturbances, the precise path for bank rate cannot be preordained. 24 but “ data driven ” means more in the post - crisis world. the economy ’ s performance will, over time, reduce some of the uncertainty about its supply side and underlying inflation dynamics. although great uncertainties remain, we are arguably