factors ranging from higher demand in a fast - growing world economy, particularly from china ; and risks to supply emanating from opec cutbacks, supply disruptions in a number of oil - producing countries, geopolitical tensions and adverse weather conditions. these factors have contributed to the upside risk to the oil price. how should monetary policy react to this? the impact of a change in the international oil price is direct and relatively quick, given that domestic petrol prices are adjusted each month in terms of the formula of the department of minerals and energy. petrol has a weight of about 5 per cent in cpix, so a 10 per cent increase in the petrol price would increase cpix inflation by approximately 0, 5 percentage points. this is the impact effect or what we call the first - round effect, and clearly there is nothing we can do about this. our concern is with the broader impact of this effect, that is, the so - called second - round effects. we have to assess whether or not these increases will be passed on over time in the form of higher transport costs which will increase prices of other commodities, for example food, or through higher production costs. we also have to assess whether there will be an impact on wage and price setting, which will impact broadly on inflation. over the past two years these second - round effects have been relatively moderate. this could be due to a number of reasons, including increasingly anchored inflation expectations as a result of enhanced monetary policy credibility ; increased competitiveness in the economy ; and the fact that some of these increases were in fact reversed late last year. the longer the international oil prices are subject to upward pressure, the more likely these second - round effects will feed through to generalised inflation. the challenge for the mpc therefore is predicting not only the future course of volatile international oil prices, but also assessing how these increases will feed through to further inflation pressures over time. in deciding on the appropriate monetary policy response, it is not always easy to differentiate between first and second round effects. some analysts have argued that we should exclude food and oil from the price index that we target. we do not believe that targeting such an index would be credible. the economist magazine has appropriately referred to such an index as “ the cold - and - hungry index ”. 4. food prices food prices have also become a cause for concern. food prices have a weight of almost 26 per cent in the cpix basket, although this proportion is much higher at around 51

questions will be critical to understanding racial and ethnic differences in lending outcomes. staff at the federal reserve will continue their research, and we hope and expect others will join them. research would benefit greatly from the input of banks and mortgage lenders such as yourselves. the national bankers association, in particular, has provided valuable insight in the past into the structure and dynamics of mortgage lending markets with substantial minority populations, and into ways lenders could better serve those markets. we value your information as we collectively search for ways to improve the efficient operation of the mortgage market and the health of our economy and society more generally. in the case of conventional first - lien home - purchase loans extended in 2004, 32. 4 percent of blacks and 20. 3 percent of white hispanics obtained higher - priced loans, compared to 8. 7 percent of non - hispanic whites and 5. 9 percent of asianamericans. robert b. avery, glenn b. canner, and robert e. cook, " new information reported under hmda and its application in fair lending enforcement, " federal reserve bulletin, summer 2005, at table 10. a. 4 / 5 conclusion in conclusion, i would like to say that we at the federal reserve value interaction with organizations such as the national bankers association so we can better understand the issues that banks face today, from capital to credit risk to compliance issues. i look forward to continuing our dialogue in the future. 5 / 5