Low inflation may be here to stay

From a speech by Deanne Julius, a member os the Bank of England's monetary policy committee at the Scottish Engineering senior executive dinner

I am happy to report that the UK economy is in good shape. The economy grew by 3.1 per cent in the year to June and is currently enjoying the longest continuous expansion in quarterly output since 1955. The unemployment rate has halved since the mid-1980s and fell further to 5.5 per cent in June. Employment is at a record level.

I am happy to report that the UK economy is in good shape. The economy grew by 3.1 per cent in the year to June and is currently enjoying the longest continuous expansion in quarterly output since 1955. The unemployment rate has halved since the mid-1980s and fell further to 5.5 per cent in June. Employment is at a record level.

This impressive performance has taken place in a climate of benign pay pressures and declining inflation. RPIX inflation was 2.2 per cent in July - the 16th month in which it has been below the target. This has been one of the reasons we have not changed interest rates for the past six months, given the symmetry of the Government's inflation target. There is a good prospect that over the next two years we will have more of the same - steady growth with low inflation.

Beneath these calm waters, however, there are some cyclical undercurrents. We think that private spending growth may be slowing from high levels, partly in response to the four interest-rate rises between last September and this February and the strength of sterling.

But the view is muddied by erratic growth out-turns reflecting Millennium distortions. As these unwind, we will have a better idea of whether private demand will slow sufficiently to create room for the planned increases in government spending over the next few years. The committee also remains vigilant to any resurgence in pay pressures stemming from a tight labour market and persistent skill shortages - though the latest earning numbers offer some encouragement on this front.

Understanding the cyclical state of the economy is necessarily a short-term - and at times hazardous - occupation, concerned with assessing the "news" about inflationary pressure in each piece of economic data as it becomes available. But it is also important to take account of the less readily observable structural influences that affect our economy. In the 1990s a number of simultaneous innovations - the development and spread of information and communications technologies (ICT), the rapid expansion in world trade and foreign direct investment, and the launch of the single currency in Europe - created the prospect for our economies to embark upon another wave of productivity-led growth.

Within the manufacturing sector there are dynamic new growth areas. Hi-tech industrial sectors, such as computers and mobile phone production, have achieved double-digit growth in three of the past four years. This is changing the shape of the corporate landscape - from the auto to the airline industry, from "old economy" retailers to "new economy" e-banks.

Rather than simply exacerbating the old dichotomy of manufacturing vs services, these changes are creating intense pressures for root-and-branch restructuring of companies of all types, and up-skilling of their employees. This is creating an interesting economic dynamic - in the growing dispersion of both profits and wages.

There are major challenges ahead. Exchange rate volatility is likely to stay with us, and there are few signs that the strength of sterling is about to be significantly reversed.

On the structural front, downward pressures on prices are likely to persist, as emerging economies continue to gear up their productive capacity and skill base, enabling them to move up the value-added chain. ICT will bring them directly into our markets, as we have long been in theirs.

Labour-market trends - namely the ageing of the workforce and the shift toward women - pose new challenges for companies in managing and motivating their vital human capital.

These structural changes which I have described make my job both more difficult and more interesting. Shifting trends limit the extent to which the past provides a useful guide to the future.