. accordingly, the composition of domestic demand secures the simultaneous achievement of rapid growth and disinflation. ( iii ) although the strong position of the ytl against foreign currencies is a factor that supports domestic demand growth, it restricts the impact of rapid growth on prices not only by its direct effect on prices but also by stimulating investment demand, which in turn induces productivity gains. graph 13. output gap ( percent ) - 2 - 4 - 6 - 8 06 - i 05 - iii 05 - i 04 - iii 04 - i 03 - iii 03 - i 02 - iii 02 - i 01 - iii 01 - i 00 - iii 00 - i - 10 source : cbrt. despite the fact that the recent data provide signals for an ongoing strong course of domestic demand, within the framework of non - inflationary rapid growth analysis explained above, the output gap is expected to support the disinflation process in the first half of 2006 as well. nevertheless, our view that the contribution of supply - demand conditions to the disinflation process has diminished is still valid. foreign demand the current account, which was usd 15. 6 billion in 2004, reached usd 23. 1 billion in 2005, realizing 6. 4 percent of the gnp ( graph 14 ). the upward trend in the current account deficit continued in the first two months of 2006. graph 14. current account balance / gnp ( annualized, percentage ) - 1 - 2 - 3 - 4 - 5 - 6 05 - ii 04 - iii 03 - iv 03 - i 02 - ii 01 - iii 00 - iv 00 - i 99 - ii 98 - iii - 7 source : cbrt. in 2005, while the rates of increase of both exports and imports weakened compared to 2004, the rate of increase in exports remained well below the rate of increase in imports in the second half of the year. the said tendency continued in the first two months of 2006 as well ( graph 15 ). the decline in textiles and apparels exports on an annual basis since november 2005 has had an unfavorable impact on general export performance. while rapid economic growth leads to an increase in the imports of intermediary goods, the rises in oil prices boost the amount of imports infused terms. graph 15. imports and exports ( * ) ( billion usd, annual percentage change ) imports exports jan - 06 nov - 05 jul - 05 sep - 05 may - 05 mar - 05 jan - 05 nov -

this depreciation may have had on inflation, it is worth recalling that imported goods and services account for around a quarter of the consumer price basket. so a simple thought experiment in which import costs increased in line with the fall in the value of sterling and these increased costs were fully passed - through into retail prices would imply an increase in the price level of around 6 percentage points. now there are many reasons why this simple thought experiment is likely to be misleading. but it does serve to emphasise the potential size of the effect associated with sterling ’ s depreciation and how different judgments concerning its impact could have very different implications for inflation. it was difficult to judge in advance the extent to which sterling ’ s depreciation was likely to feed through into consumer prices. in part, that was because this was the first example of a large exchange rate depreciation since the uk had started inflation targeting. this matters because the size and nature of pass - through is likely to depend on the monetary policy regime. moreover, pass - through from changes in the exchange rate to import prices, and then to consumer prices, has varied considerably over time. as my fellow mpc member adam posen pointed out recently, a range of studies suggest that exchange rate passthrough declined during the period of great stability ( posen 2010 ). even ex post, the impact of the depreciation on consumer prices is hard to assess. the peak impact of the exchange rate depreciation on cpi inflation was probably somewhere in the range of 2 to 3 percentage points. while the scale of the total pass - through to retail price inflation appears broadly similar to past experience, companies seem to have passed through increases in import cost more quickly than in the recent past. 3 that quicker passthrough is likely to help explain why inflation over the past year or so has been higher than the mpc had anticipated. what evidence is this based on? the production of goods ( excluding energy ) tends to be more import - intensive than that of services, so the relative trends in goods and services price inflation can help to assess the impact of the depreciation on consumer prices. between 1997 and 2008, annual non - energy industrial goods price inflation averaged around 6 percentage points lower than services price inflation. but that wedge closed during 2009, as non - energy industrial goods price inflation soared and services price inflation fell to below its historical average ( chart 1 ). moreover, the relatively close co - movement between finished manufactured goods import