: ons, lseg refinitiv and bank calculations. conclusion the direct effect on inflation of the pandemic and the war have now faded. having accounted for the significant majority of the rise in inflation in 2021 and 2022, the passthrough of the ups and downs in tradeable prices have since accounted for most of its decline as well. what we ’ re now left with are the more persistent, second - round effects of that earlier surge on domestic inflation. how long these persist is unclear. if the process were entirely symmetric then you might expect these effects to unwind relatively quickly, within the next year or so. chart 4 says the original hit to real national income has now been reversed. ( the counterpart for working households has been pretty strong real wage growth – chart 11. ) chart 7 suggests that the second - round effects of the hit took around eighteen months to get going and that they might have peaked some time last autumn. and monetary policy is more restrictive now than in 2022 and the first half of last year. chart 11 : real pay will grow significantly this year sources : ons and bank calculations. private sector regular pay deflated by the consumption deflator. chart shows a bank staff estimate of ‘ underlying ’ pay that removes pandemic - related compositional effects. mpc forecast for 2024. but the committee has judged for some time that the process is likely to be asymmetric – that, in the words used in recent monetary policy reports, “ second - round effects in domestic prices and wages will take longer to unwind than they did to emerge ”. judging by what the bank ’ s agents are telling us about wage growth in 2024 – their forecast would entail almost no convergence to our wage equations through the rest of this year ( or therefore any diminution in the aqua line in chart 7 ) – that seems right. on the other hand, the agents are also reporting that firms feel less able than they did last year to pass through in full these higher wage costs. and if the origin of these second - round effects is the squeeze in real incomes in 2022, their recovery this year may matter. the more that ’ s regained, the less ground, relative to some notional “ norm ”, there is to make up. this is why i was content to reduce the scale of these persistence effects in the third year of the may mpc forecast. there is a range of views across the committee on

coincide with the appearance of similar residuals in standard, empirical models of wage growth ( charts 6 and 7 ). chart 6 : recent wage growth stronger than can be accounted for by usual causes sources : barclays, ons, yougov / citigroup and bank calculations. wage equation based on yellen. chart shows a bank staff estimate of ‘ underlying ’ private sector regular pay growth that removes pandemic - related compositional effects. short - term inflation expectations are based on the barclays basix index and the yougov / citigroup one - year - ahead measure of household inflation expectations and projected forward based on a bayesian var estimation. slack is based on the mpc ’ s estimates informed by the vacancies to unemployment ratio. productivity growth is based on long - run market sector productivity growth per head. chart 7 : excess price and wage growth may reflect second - round effects of earlier squeeze on real incomes the residuals in this chart are the gold bars from chart 5 and chart 6. thankfully, that original inflationary impulse has faded. tradeable goods prices have stabilised and in some cases fallen back quite a bit. ( indeed, the estimates in chart 5 suggest that their direct contribution to annual cpi inflation prices is unusually negative right now, by enough to bring headline inflation back to around its 2 % target in the current quarter. this effect too will fade, which is why we think inflation is likely to rise again in the second half of the year : the mpc ’ s central forecast has annual cpi inflation at 2½ % in the fourth quarter of this year. ) tighter monetary policy has also contributed to the decline in inflation, both by reducing excess demand ( those purple bars again ) and by limiting what might otherwise have been much larger second - round effects. exactly how long those effects might last, for given policy, is a central question for the committee and one i ’ ll return to later. the consequences of variable costs and supply if falling import prices in the years leading up to the financial crisis contributed to the “ niceness ” of that decade, the big jumps in 2021 and 2022 were clearly much nastier. not only did they push up inflation but, by depressing real incomes, they also threatened to reduce domestic output and employment. so if ( somewhat crudely ) one divides economic disturbances into demand - like shocks – things that push output and inflation in the same direction ( chart 8a ) – and those that affect supply or costs