' t want work to stop. but high and unpredictable inflation makes it difficult to agree on fair compensation for work, and that leads to strikes. when inflation is high and volatile, contracts get shorter, negotiations are harder, and uncertainty is higher for everybody. businesses have also changed the way they price their goods and services, raising prices more often and by larger amounts. that hurts their relationships with customers, raising suspicion and blame. for all these reasons, inflation makes people unhappy. in our most recent consumer survey, almost 9 out of 10 respondents said they feel worse off due to high inflation. almost no one said they benefit ( chart 4 ). and inflation is changing behaviour. we can see in our surveys that families are changing their spending to protect themselves from inflation. they're spending less and trying to find cheaper goods and services ( chart 5 ). 2 / 5 bis - central bankers'speeches this is particularly difficult for lower - income canadians. when people are spending more of their income on necessities, it's hard to shift what they need to buy, and they have little savings to buffer higher prices. moreover, necessities - food and rent - have had some of the fastest price increases over the past few months. canadians on fixed pensions are also particularly affected because they are not receiving any increase in their income to compensate for higher prices. what happened in the 1970s we have seen inflation and the unhappiness it brings before. indeed, what we're feeling today is reminiscent of the 1970s. i was a teenager in the 1970s. for those of you who are too young to remember, inflation in the 1970s was high and variable. it averaged more than 7 % for the decade and peaked at nearly 13 %. then, as now, global forces ignited the run - up in prices. a global food shortage and the organization of the petroleum exporting countries'oil embargo in 1973 caused inflation to rise quickly. my impression as a teenager was that inflation made everyone angry. there were a lot of labour strikes in the 1970s. many were long and heated. people felt ripped off because they would get what looked like a good pay raise, but their money didn't buy what it used to because prices were higher. to get inflation down in the 1970s, policy - makers tried a few things, including price and wage controls as well as monetary targeting - slowing the growth of the money supply. unfortunately, these policies were ineffective. and the government and central bank

. this increase in labour costs coincided with a period of slower growth in labour productivity. since 2005, estimated labour productivity growth has averaged less than ½ per cent per year, compared with average growth of 2 per cent over the 1990s. the reasons for this slowdown are not fully understood, although it may partly be a result of the high commodity prices that have allowed lower quality and / or more costly mines to be developed. in any case, productivity growth will need to pick up again if our living standards are to improve at the rate we have become accustomed to over the past two decades. this is a major challenge facing both the private and public sectors. looking back to the recent cycle in inflation, it is clear that developments in unit labour costs had a significant role, both in contributing to the increase in inflation and then to its decline. but they provide only a partial explanation, and alone cannot explain why inflation picked up so sharply in 2007 after having been stable over the preceding few years. one possible explanation for this pattern is that there is some threshold in capacity utilisation which when crossed causes inflation to increase very quickly. an alternative explanation is that the short - run dynamics of underlying inflation were influenced by other factors during this period. it is difficult to formally test these two explanations, but other factors do appear to have played a significant role. of these, developments in housing costs were perhaps the most important. housing cost inflation currently, housing - related costs – including rents, utilities and the cost of building new dwellings – account for around 20 per cent of the cpi, the largest share of any single group. broadly speaking, the housing component of the cpi shows the same general pattern as that in underlying inflation, although the recent moderation is less pronounced ( graph 6 ). bis central bankers ’ speeches graph 6 a couple of factors are important in explaining this general pattern. the first is that the large run - up in australian house prices that was driven by the adjustment to low inflation ended in late 2003. when the housing boom came to an end, building cost inflation came down and growth in rents was subdued for a few years. these outcomes helped hold down overall inflation rates during this period. but by 2007, the cycle had again turned, with building costs rising more quickly and growth in rents accelerating. this faster growth in rents reflected the changing balance of demand and supply in the rental market, with strong population growth coinciding with relatively slow expansion of supply. the second factor has been utilities prices. during