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mpc: 7 24 Given that the expected path of aggregate demand was close to estimates of the economy's productive capacity, judgments on the outlook for inflation over the forecast horizon depended to a significant degree, as in November, on views about the implications of developments in technology and in competition. The Committee concluded that, in its best collective projection, the downward adjustments should be slightly larger than in November. 25 Some members preferred a smaller adjustment to price-cost margins, particularly in the second year of the projection. While there were undoubtedly major changes underway in competition and technology, the implications for inflation were not straightforward. There had been major technological changes in the real economy during the 1970s and 1980s ­ for example, in computing power ­ but that period had also seen the highest inflation rates in modern British history. Such developments entailed changes in relative prices, but it was unclear how large changes in some relative prices should be translated into a change in the aggregate price level. Some other members preferred larger downward adjustments to price-cost margins in both years than in the best collective assumptions. For example, the effects of the Internet and e-tailing would most likely be greater than assumed, with larger second-round effects on costs and prices. More generally, the supply side innovations did not just entail relative price changes but were characterised by a generalised intensification of product market competition and so were affecting the economy as a whole, with a compression of average margins.

The February output growth and inflation projections

26 The Committee agreed the projections to be published in the Inflation Report on Thursday 17 February. 27 On the assumption of an official repo rate of 6.0% over the next two years, the best collective projection was for output growth to rise to about 3% and then fall back to around 2½% ­ close to most estimates of trend ­ for most of the forecast period. This was softer than in November, largely reflecting the tightening of monetary policy and sterling's appreciation. 28 On the best collective projection, RPIX inflation fell slightly from its current level of 2.2% to about 2% during 2000, and then rose gradually to around the 2½% target from mid-2001. There was less of a saucer shape (that is, a dip followed by a sharp upturn) than in November, reflecting upward pressures early in the forecast period from higher earnings growth than in the November projection and downward pressures later on in the forecast period from the restraining effects of tighter monetary policy and the higher exchange rate.