The financial crisis has changed the economic landscape and central banks must now consult labor-market data to assess price pressures in the economy, Bank of England Deputy Governor Ben Broadbent said.
“The output data are no longer sufficient statistics for inflationary pressure: even if you have to wait a while to see them, movements in unemployment become important too,” Broadbent said in a speech today in Jackson Hole, Wyoming. “When productivity growth is no longer so predictable life is a little trickier.”
Broadbent’s comments at the Kansas City Fed’s annual symposium come a year after the BOE introduced forward guidance and linked policy to unemployment. He said stagnation in productivity since the crisis meant there was more uncertainty about U.K. potential growth and that labor data help officials to analyze spare capacity and make better policy judgments.
For example, strong economic growth may require extra resources, which may add to inflation pressure in the economy. However, the pickup may also be accompanied by productivity gains, which wouldn’t require tighter policy, he said.
Jobs figures “give one a better steer about the evolution of spare capacity than output growth alone,” Broadbent said. “So, even if you have to wait a while to get it, information from the labor market becomes more valuable the less certain one’s estimate of underlying productivity growth.”
Broadbent noted a drawback to this new focus was that employment developments often lag the broader economy.
“This isn’t costless,” he said. “Because the labor-market movements apparently take longer to appear, over the cycle, there’s now a trade-off between the accuracy of the information about inflationary pressure and its timeliness.”
While the BOE has dropped its link between policy and the unemployment rate, Governor Mark Carney said this month that policy makers would put increasing weight on wage data in their assessment of when to raise the benchmark interest rate from a record-low 0.5 percent.
Broadbent said in the speech that nominal wage growth has been “much weaker than we expected.”
While surveys indicate some of the softness in wages may be reversed later this year, it’s also possible that Britons have become more accepting of lower pay awards and that salary growth has adjusted downward due to weak productivity, he said.
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