The best policy is to run budget surpluses, which would lower interest rates and increase business investment in new technology. Clearly, what happens to energy prices will significantly affect whether this forecast will hold. DRI also forecasts continued growth in labor productivity at 3.5 percent, following an increase of 3.9 percent in 2000. This would help keep unit labor costs from accelerating. There are several risks to the forecast.
Great uncertainty surrounds the energy prices.
Should they continue their upward spiral, inflation could re-emerge. If demand rebounds from its current slowdown, wage gains could be pushed beyond the productivity gains, causing unit labor costs to increase. The FED will respond to any unexpected acceleration in inflation by increasing interest rates. Alternatively, if the economy slows too much, corporate earnings may be reduced more that expected, which would put the stock market at risk for further correction.