. once again output contracted and unemployment rose sharply ( chart 2 ). a third and final bout of rising inflation and falling output occurred in the early 1990s, with the unemployment rate once again rising above 10 %. on average, inflation in the 1970s was around 13 % and 7. 5 % in the 1980s. the uk macroeconomic framework why was it that output and inflation were so volatile then and why has economic performance improved so much in the past 10 years? these questions are vital as we face more uncertain times ahead and to ensure that we avoid repeating the mistakes of the past. i would point to three main factors. there have been changes to the structure of the uk economy that have made it more flexible and adaptable. labour market reforms enacted over the past twenty - five years have led to a more flexible workforce. unemployment has fallen without generating unsustainable growth in wages, and hence inflation. and in recent years the role of migrant labour has been important in easing the bottlenecks and skill shortages in what was otherwise an undoubtedly tight labour market. firms have been able to adjust and adapt to events more quickly and that has produced less volatility in output, employment and inflation for the economy as a whole. with economic growth expected to slow over the coming year pressures in the labour market are likely to ease, reducing the demand for migrant labour, and possibly beginning to reverse recent strong inflows. a second fundamental change has been to the monetary policy framework. the experience of those three recessions and bursts of inflation has led to a settled consensus that monetary policy should be directed at controlling inflation and that there is no long - run trade off between inflation and output growth. this consensus has been embedded by transferring interest rate decisions to an independent bank of england, with a clearly defined inflation target of 2 % measured by annual cpi inflation. that has helped build confidence that if inflation does move away from target, we on the monetary policy committee will act to ensure that it returns to target in the medium term. that confidence should ensure that it has only deviated by more than 1 percentage point from that average on 4 occasions. to put this in context, in the preceding 3 decades stretching back to the 1960s, annual gdp growth deviated from its 10 year average by more than 1 percentage point about half of the time ( about 20 quarters in each 10 year period ). employers and employees are less likely to adjust their prices and wages to a surprise movement in inflation. in other words, their expectation

around two years, when the present sharp rises in energy and food prices will have dropped out of the cpi inflation rate. we judge that in order for inflation to return to target it will be necessary for economic growth to slow this year, reducing the pressure on supply capacity of the economy and dampening increases in prices and wages. but the risks to both the upside and downside remain large and the mpc will continue to make its judgement about the appropriate level of bank rate month by month. the next year is not going to be comfortable for anyone and we already hear calls to change the system, the target, and our focus on inflation. but the new framework and the independence of the bank was designed for difficult times as well as for plain sailing. i hope we can look to you and other businesses for support in doing what is needed to bring inflation back to target.