are stable, which bolsters the inference that the economy has not entered a situation of steadily rising inflation. most economic forecasts point to a gradual approach toward full utilization of the productive capacity of the economy. commodity, energy, and import prices are unlikely to continue moving up at the speed of recent quarters. productivity growth is still strong. and elevated profit margins are available to absorb increases in unit labor costs for a while. as a result, inflation is most likely to remain at levels consistent with a continuation of effective price stability. that said, the federal funds rate cannot be held at its current level indefinitely if price stability is to be preserved. the very accommodative stance of policy - including both the low level of the funds rate and the fomc ’ s indications that it was intending to hold it at that level for a while - was put in place to counter unusually weak demand and declining inflation. circumstances have changed and policy will respond. the challenge we face is to remove the accommodation in such a way as to foster both the return to full employment and the maintenance of price stability. because i believe that the rise in inflation will be limited and because i agree that growth of output is likely to only moderately exceed the growth of the economy ’ s potential, i supported the fomc ’ s assessment at its last meeting that accommodation likely can be removed at a pace that is likely to be measured. but experience counsels caution. there is much about the inflation process that we do not understand, and i have been surprised at the extent of the pickup in core inflation this year. moreover, measures of inflation expectations will require careful scrutiny as we move forward. an examination of the variables believed to proxy for aggregate demand and potential supply can help to explain inflation and to forecast future price developments, and the concepts are integral to making monetary policy. but given our limited understanding of price determination, we must also keep a close watch on actual inflation outcomes. it took about twenty years to undo the effects on economic behavior of the inflationary episode of the 1970s. we must preserve those gains if we are to meet our responsibilities for fostering economic growth and stability.

reduced the intensity of foreign competition felt by u. s. producers, which may be one source of the sense among domestic producers that their pricing power has returned. commodities and imports are only a small part of what we consume, and changes in their prices as well as in the price of energy usually do not affect measured core consumer inflation very much. but the recent situation has been notable for the size and number of price shocks going in the same direction, so that even with limited pass - though of individual price movements, the total effect probably has been significant. judging from the results of statistical models incorporating the factors we have been examining, increases in commodity, energy and import prices together might have boosted core consumer inflation on the order of roughly 1 / 4 to 1 / 2 percentage point over the past four quarters. but we are already seeing evidence of the limited nature of these types of price - level adjustments. the prices of many non - energy commodities have come down from their peaks lately, perhaps reflecting an actual or expected moderation of growth in asia and ongoing demand and supply responses to higher prices. in addition, the dollar has stabilized as optimism has increased about the strength and durability of the expansion in the united states. energy prices have continued to climb, but futures markets see some moderation of these prices getting under way before long. if these circumstances prevail, shocks to commodity, energy, and import prices should no longer be adding as much to inflation. of course, over the longer haul, whether or not these one - off shifts in the price level lead to ongoing price inflation will be determined by their effects on inflation expectations and the response of monetary policy, an issue i will refer to shortly. productivity. the rate of increase in productivity also can have important effects on inflation pressures. in the past few years, for example, the juxtaposition of very rapid productivity growth and weak aggregate demand has resulted in the slack in resource utilization i talked about earlier, which contributed to the decrease in inflation. but productivity growth also influences inflation through its effects on labor compensation and profit margins. over the long run, real labor compensation tends to track labor productivity. this implies that when productivity accelerates, compensation eventually will as well. the record of the post - world war ii period suggests, however, that changes in compensation tend to lag well behind changes in productivity trends. thus, when underlying productivity growth picks up, firms tend to enjoy a wider profit margin for a time because unit labor costs