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mpc: 4 demand growth. But while there was probably still spare capacity abroad, some members felt that it would be eroded as the world economy recovered, tending to put upward pressure on import prices. 13 On balance, the Committee had assumed that net trade would make a negative contribution to GDP throughout the forecast period, reflecting the further rise in the sterling exchange rate and a likely increase in imports.

The labour market

14 There was some evidence that the labour market had tightened further. Over the quarter, claimant count unemployment had fallen to 4.2%, and the Labour Force Survey (LFS) measure to 5.9%. Employment had continued to rise, as had total hours worked. Some forward-looking indicators suggested continued tightening. Employment intentions, as measured by surveys, were up in all sectors and were above average historical levels. Skill shortages persisted according to the Bank's regional Agents and surveys, but with differences across regions and different types of skill. The picture from surveys was mixed. The BCC measure of recruitment difficulties had fallen slightly in both manufacturing and services. The CBI survey showed skill shortages rising slightly but with the level still below its historical average. 15 Real earnings growth calculated on the basis of the Average Earnings Index (AEI) had been rising for some time, with the recent rate faster than would have been expected on the basis of the changes in unemployment and employment. As noted above, one possible explanation for this was that a greater-than-generally-expected decline in inflation had boosted ex post real earnings. Another possible explanation was that the `natural' rate of unemployment, the rate consistent with stable inflation, was higher than the Committee had assumed in its August projections. Some members thought it unlikely that the `natural' rate was below the current actual rate or that it was continuing to fall at the same rate as actual unemployment, so that there was good reason to think that labour market pressures had been increasing. Other members noted that the Reward Index showed earnings growth still trending lower and the New Earnings Survey also gave a more benign picture of earnings growth than the AEI. Although there were different interpretations of the latest data, the Committee agreed to take as its central projection a higher assumption for real earnings growth than in August. 16 The recent nominal pay data presented a second puzzle. On the one hand, settlements had remained around 3.5%. On the other hand, the AEI had risen at an annual rate of 4.9% in the three