general context ; mankiw and reis ( 2003 ) present related results. bodenstein, erceg, and guerrieri ( 2007 ) apply this reasoning to oil price shocks. see taylor ( 1979 ). ball ( 1994 ) presents estimates of the costs of disinflation for a variety of countries, including the united states. kiley ( 2008 ) provides evidence on how survey measures of inflation expectations in the united states have responded to economic developments and presents a model that attempts to explain the patterns in the data. which any deviations of inflation from long - run objectives are tolerated to allow the efficient relative price adjustments that i have described needs to be tempered so as to ensure that longer - term inflation expectations are not affected to a significant extent. global demand, trending commodity prices, and monetary policy my remarks so far have concentrated on the factors guiding the monetary policy response to a shock in the prices of commodities like oil that stems from a shifting balance of supply and demand in the specific market for these commodities. some might think that this focus misses the point in the current context, for at least two reasons. first, it has been suggested that the run - up in the prices of a broad range of commodity prices reflects, in part, global excess demand rather than sector - specific forces. and second, some have suggested that important commodity prices, like that of oil, may be on a more significant upward trend than is currently embedded in futures prices. it seems highly likely that, over the period since 2003, the rise in commodity prices has reflected strong global economic growth as well as some sector - specific factors, such as geopolitical tensions and other disruptions to the supply of oil. 12 in this regard, i share the views expressed by chairman bernanke at this conference two days ago in which he discussed a range of factors that have likely influenced relative commodity prices. 13 however, the fact that rising relative commodity prices have likely reflected many factors does not, by itself, change the analytical framework that i used to frame policy deliberations. as i highlighted at the beginning of my remarks, the most important drivers of inflation in the model of inflation dynamics i use are relative price shocks, inflation expectations, and the balance between aggregate demand and supply in the united states, as measured by some notion of resource utilization. if a shift in global demand affects both commodity prices and the demand for u. s. goods, the model i have in mind accounts for these influences on

- energy - intensive goods, but this adjustment follows a gradual and asynchronous pattern. similarly, the equilibrium real wage – the relative price of labor – will tend to be depressed by an oil price shock due to the accompanying adverse movements in the terms of trade and reduction in labor productivity, but the needed wage or price adjustments proceed gradually. 8 an efficient monetary policy should attempt to facilitate the needed economic adjustments so as to minimize distortions to economic efficiency on the path to achieving, over time, its dual objectives of price stability and maximum employment. 9 in particular, an appropriate monetary policy following a jump in the price of oil will allow, on a temporary basis, both some increase in unemployment and some increase in price inflation. by pursuing actions that balance the deleterious effects of oil prices on both employment and inflation over the near term, policymakers are, in essence, attempting to find their preferred point on the activity / inflation variance - tradeoff curve introduced by john taylor 30 years ago. 10 such policy actions promote the efficient adjustment of relative prices : since real wages need to fall and both prices and wages adjust slowly, the efficient adjustment of relative prices will tend to include a bit of additional price inflation and a bit of additional unemployment for a time, leading to increases in real wages that are temporarily below the trend established by productivity gains. i should emphasize that the course of policy i have just described has taken inflation expectations as given. in practice, it is very important to ensure that policy actions anchor inflation expectations. this anchoring is critical : as demonstrated by historical experiences around the world and in the united states during the 1970s and 1980s, efforts to bring inflation and inflation expectations back to desirable levels after they have risen appreciably involve costly and undesirable changes in resource utilization. 11 as a result, the degree to confirmed by mark hooker ( 2002 ) in his work documenting a break in the link between oil prices and inflation in recent decades. for example, rudd and whelan ( 2007 ) and kiley ( 2007 ) review a number of models and empirical studies as well as conduct their own empirical analyses ; these two studies reach quite different conclusions on the merits of alternative specifications. for example, see the article by chao wei ( 2003 ) illustrating the effects of a rise in oil prices in a dynamic equilibrium model. erceg, henderson, and levin ( 2000 ) discuss the importance of relative price adjustments in the presence of sluggish nominal prices and wages in a