it is important to recognise that the last ten years have been a period of remarkable stability for the uk ’ s economy. it has certainly been the most stable and successful period for the economy in my lifetime. 1 when the mpc was set up, charlie bean – then a leading academic, soon to be my fellow deputy governor – estimated that inflation would be away from the target by more than 1 percentage point in nearly 5 months of every year. yet this week the governor ’ s open letter to the chancellor to explain why inflation last month had deviated by more than a percentage point from the target was only the second written in over 10 years. and taking the past decade as a whole, this stability of inflation has not come at a cost to growth – quite the opposite in fact. output growth has been high both relative to the rates indeed work done at the bank suggests that in terms of inflation, it has been the most stable decade in many lifetimes – that is, since the restoration at least ( benati ( 2006 ) ). achieved on average over the preceding 30 years and in comparison with our european neighbours. it also has been remarkably stable. 2 of course that stability at the macro level disguises some big changes in the structure of the economy. indeed it has provided a platform for change. the north east for example is now much more diverse than it was and less reliant on a few large industries. and, overall more people are employed in the region : the number employed in the north east has risen by more than 100, 000 in the past ten years. and export growth remains relatively buoyant. in contrast to this picture of stability, the preceding 3 decades were scarred by painful recessions where unemployment rose sharply, and inflation fluctuated wildly. in particular, there were three episodes between the mid - 1970s and early 1990s, when inflation rose very sharply, and at around the same time output contracted. while there are many in the room that don ’ t need reminding, i thought i would just give the younger members of the audience a reminder of just how desperate those times were ( chart 1 ). in 1975, rpi inflation peaked just shy of a staggering 27 % while at the same time output fell. it was this era that entrenched the term “ stagflation ” in the minds of the public. inflation fell back sharply over the subsequent year or so, only to rear its head again in 1979 - 80 – this time peaking at around 22 %

feeding into price and wage setting in a more persistent way. what is clear is that our monetary policy measures have been successful in avoiding a deflationary spiral and securing the anchoring of inflation expectations. in the past, as interest rates approached zero, some did question our ability to add sufficient accommodation to combat a prolonged period of too - low inflation. we answered those doubts by demonstrating that we would take any measures necessary within our mandate to deliver our mandate, and that those measures were effective in further easing financial conditions. deflation risk premia, which had been growing in 2014 and 2015, have now been more or less priced out of market - based inflation expectations. that being said, a prolonged period of low inflation is always likely to be exacerbated by backward - lookingness in wage and price formation that occurs due to institutional factors, such as wage indexation. this has plainly happened in the euro area. ecb analysis finds that, compared with long - term averages, low past inflation dragged down wage growth by around 0. 25 percentage points each year between 2014 and 2016. the evidence as to whether backward - lookingness has increased recently is mixed. there were signs that indexation had fallen in the early part of the crisis, and ecb empirical estimates 4 / 7 bis central bankers'speeches suggest that the weight of past inflation in current inflation has decreased. yet there is also evidence that indexation has returned in some large euro area countries. in italy, for example, backward - looking indexation of wages now covers around one - third of private sector employees. 7 still, even if indexation rose, it would only create inertia in price formation : it would not obstruct the transmission process. as economic slack shrinks, upward pressure on prices will materialise and gradually enter the indexation ratchet. so once again we see temporary forces at work that should not affect medium - term price stability. and this assessment is broadly what we see in market - based inflation expectations today. interpreting with some caution, they are now consistent with the picture that our policy is effective, but that its full effects will take time to materialise. accompanying the recovery so what do these various explanations imply for our monetary policy stance? the first point to make is that we face a very different situation today from the one we encountered three years ago. then, we also faced global shocks and significant labour market slack. but the recovery was still in its infancy. global growth was slowing,