The scale of immigration and the scale of its impact on the economy emerged yesterday as the greatest uncertainties influencing the course of inflation and interest rates next year and beyond.
Presenting the Bank of England's latest quarterly Inflation Report, Mervyn King, the Bank's governor, highlighted the rapid growth of the number of people in work over the past year.
Large numbers of people past retiring age returned to the labour force as well as an unknown number of East European migrants. This has helped hold down pay despite the jump in oil and other energy prices.
National Statistics reported that average earnings, not counting bonuses, rose by only 3.5 per cent year on year in the three months to September, down from 3.6 per cent in August.
Including bonuses the increase was 3.9 per cent, down from 4.2 per cent. NS said the drop was due to the statistical effect of a sharp increase in June falling out of the average for the latest three months, rather than any sudden drop in pay awards between August and September.
The Bank will be watching for any signs of inflation measured by the Retail Prices Index, which reached 3.7 per cent in October, spilling over into a "second round" spiral in the New Year pay round.
Yesterday, though, Dr King struck a reassuring note. "Less than 20 per cent of the labour force is unionised," he said.
"Some comfort can be drawn from the much more diversified nature of wage bargaining."
The Bank's new central projection for the most likely course of inflation is for it to spike up towards a peak probably short of three per cent by the official measure this winter, then to fall back sharply next Spring to around the Bank's two per cent target and stay there until the autumn of 2009.
Meanwhile, Britain's economic growth is seen as levelling off just short of three per cent this winter, then dwindling gradually back to the long-term trend of 2.5 per cent – a more buoyant prospect than it indicated in August.
Dr King described the chance of these projections turning out precisely right as "zero". "Surprise events" of one sort or another are inevitable, he said.
The 23 per cent fall in oil prices since the last Inflation Report in August has saved him from having to write a letter to Chancellor Gordon Brown explaining why the Bank had missed the inflation target by more than one per cent.
"It is still more likely than not that we will have to write a letter in the next two years," Dr King added.
City markets took the report as an indication that Bank now expects to meet its medium-term target without raising interest rates again this winter – although Dr King stressed that it takes each month's decision as it comes.
"The main risks to the inflation outlook in the medium-term surround the behaviour of pay growth and any recovery in profit margins as energy price inflation falls," he noted.
It was impossible, he added, to know how much of the recent rise in unemployment actually represents increased slack in the labour market because of difficulties in measuring the size of the population. "We don't know how many people have come in," he said. "We don't know how large migration is."
"Virtually all" of the Poles entering between 2003 and 2005 arrived at airports other than Heathrow, Gatwick and Manchester.