no, such an unshakeable causal relationship between wage increases and inflation does not exist. it can just as easily be the case that stronger demand can allow companies to increase their prices. this increases their profits and margins, which in turn provides scope for them to raise wages. the interplay between prices, wages and activity in the economy – and of course a number of other variables, not least productivity – is complex. there are quite a few studies that have examined the links between wage increases and future inflation and whether wage increases tend to precede or lag behind inflation. not unexpectedly, the findings vary somewhat, but a fairly common finding seems to be that wage increases are not particularly informative when it comes to forecasting inflation. 7 the fact that wage increases have been modest for a while need not therefore signify that inflation will fall in the period ahead. personally, i believe that both inflation and long - term inflation expectations will remain close to 2 per cent going forward, even if monetary policy is made slightly less expansionary. 7 see for instance peneva and rudd ( 2017 ). 14 with inflation on target – new challenges so allow me to summarise. i think this survey presents three important economic policy challenges. an important starting - point is that inflation is on target. it has now been around the target of 2 per cent in outcomes and expectations for some time. target attainment is good. occasional monthly variations by the odd tenth of a percentage point around the 2 per cent mark must not determine monetary policy, as i see it. and given that inflation is on target, there is scope for considering other important macroeconomic variables. the first challenge is that for several years there has been no correlation between unemployment and vacancies on the one hand and wage increases on the other. unemployment has fallen but wage increases have remained steady at around 2 per cent as an annual rate. inflation has indeed climbed back to target without any help from wage increases, which shows that inflation does not necessarily have to be wage - driven. but there is still reason to ask oneself how permanent the subdued wage increases are. the second challenge has to do with unemployment. the key question is : has unemployment bottomed out? or can it fall further with an expansionary monetary policy? my assessment is that it will not be possible to bring unemployment down much further with monetary policy alone. in my view, the increasing demand for labour that we are currently witnessing is more likely to lead to increased labour supply than

between unemployment and wage increases in british data for the period 1861 – 1957. high unemployment tended therefore to be associated with low wage increases and vice versa, as in figure 1. when many people compete for jobs, demand for higher wage increases falls while a shortage of labour leads to greater wage increases. 2 wage increase figure 1. the phillips curve unemployment subsequently, the phillips curve concept was broadened to accommodate slightly different, though similar, correlations. in 1960, two american economists, paul samuelson and robert solow, both awarded the prize in economic sciences in memory of alfred nobel, reformulated the curve in terms of unemployment and inflation rather than unemployment and wage increases. as there is a close relationship between unemployment and output, the phillips curve was also often formulated in terms of the correlation between inflation and output – or, as it is commonly expressed nowadays, resource utilisation. but it is basically the same thing we want to identify, namely a correlation between economic activity and the rate of increase in prices and wages. for a time, the phillips curve was interpreted as economic policy - makers being able to choose a combination of inflation and unemployment. this was thought to be possible if the aim was a more permanent reduction in unemployment and there was a willingness to accept higher inflation in return. but about ten years after the launch of the phillips curve, milton friedman and edmund phelps, nobel laureates in economics themselves, each lay the foundations for the so - called “ expectations - augmented phillips curve ”. in brief, this implies that there is a short - term negative correlation between inflation and unemployment, but no long - term relationship. in other words, it is not possible to choose a certain combination of inflation and unemployment and then expect it to last. the reasoning behind this can be illustrated using figure 2. 3 inflation figure 2. the expectations - augmented phillips curve long run phillips curve d b e c a unemployment the short - term correlation basically depends on the fact that higher inflation is often unexpected inflation. an expansionary policy can lead to lower unemployment and higher inflation ; we move from a to b. but gradually, agents in the economy realise that inflation has risen and demand higher wage increases as compensation. in other words, the higher inflation is incorporated in the expectations and becomes the norm, and the higher wage increases cause unemployment to rise. the short - term correlation shifts upwards and we move from b to c. we are then back to the same unemployment as when we started, but with higher inflation. if