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mpc: 8 29 Upside risks to inflation from the labour market were stressed by a number of members. Skill shortages were high and apparently rising. Recruitment intentions, as measured in surveys, remained strong. If they were realised, total hours worked might continue to grow at the recent rate of around 0.8% per year. In that case, if hourly productivity were to grow in a range of, say, 2.0% to 2.5%, output growth in a range of 2¾ % to 3¼ % (or around ¾% per quarter) would be implied. In fact, the central projection was for growth to slow and for unemployment to begin rising soon, so those would be crucial indicators going forward, as would be the coming round of pay settlements. A second key upside risk to inflation was the possibility of sterling's exchange rate falling by more than assumed in the central projection. These two risks were not independent. Sterling's appreciation over the past few years had increased households' spending power and so had helped to dampen pay pressures. A depreciating exchange rate would, conversely, tend to intensify pay pressures. To the extent that productivity growth increased, that would help to offset any such pressures, but there was a risk that, as in the past, cost pressures would eventually feed through into higher prices. A third upside risk was that private sector final demand would not slow as sharply or as soon as assumed in the central projection, although it was possible that the effects on aggregate demand could be offset by a larger- than-expected negative contribution from net trade. 30 On the downside, members generally thought it possible that the international outlook could prove weaker than currently expected, given tighter credit conditions, the apparent slowdown in investment in the US, and fragility amongst some emerging market economies. Domestically, some members thought that the supply-side performance of the economy might prove to be better than assumed, either because the recent earnings figures suggested that the rate of unemployment consistent with stable inflation was lower than assumed or because the recent improvement in hourly productivity growth might be sustained. Some members pointed to the possibility that GDP growth might have been increasingly understated in recent years because of the possible mis-measurement of the ICT sector. This might have had the effect, in their view, of imparting an upward bias to the inflation forecast. In addition, fiscal policy could turn out tighter than planned, given the higher-than-expected tax yield and the possibility of continued underspending by Departments. The fiscal measures on which the Government was consulting would, if and when implemented, temporarily reduce inflation. On one view, a more rapid slowdown in output growth was implied by various leading indicators and by a measure of monetary conditions that incorporated the continued effect of the rise of the exchange rate in recent years. With the economy at (or perhaps past) a turning point in the growth cycle, it was possible that the Committee's forecasts would not adequately capture any downward revisions in