interactions between energy prices, growth, and inflation – the determinants of oil prices and about the effect that oil prices have on the world economy. the proceedings are available at http : / / www. bostonfed. org / economic / conf / oil2010 / index. htm bis central bankers ’ speeches the impact of recent supply shocks now that you know my basic take on this key – and current – economic debate, allow me to flesh out my perspective with the supporting data and analysis. the full impact of the recent shocks to supply that i mentioned at the outset will likely emerge over time. but clearly there have been significant increases in a variety of food and energy prices. as figure 1 illustrates, the recent turmoil in the middle east has contributed to a significant increase in oil prices, which have risen to over $ 100 a barrel. this is well above the average of nearly $ 80 a barrel experienced over 2010, but at the same time still well below the peak of $ 146 a barrel that occurred in mid july, 2008. the recent volatility in oil prices, as the chart shows, is quite striking. sharp increases have been followed by sharp decreases. this is one reason we may not want to overreact to price changes – they could be transitory. figure 2 shows the movements in oil prices – their percent change from a year earlier, in the top line – relative to the change in compensation ( the lower line ), since 2000. oil prices have risen recently, but based on the history captured in this chart, one would not expect much of a response in wages and salaries. this, of course, is one reason why consumers feel worse off after an oil supply shock. prices at gas stations in massachusetts are now around $ 4. 00 a gallon, yet most people ’ s need to drive cars has not changed much if at all. so income available for buying other goods and services has been squeezed by the increase in oil prices. 3 some softness in measures of consumer confidence suggests that consumers tend to be less confident about the future when oil prices rise. if consumers pull back spending as a result of a supply shock, it has the potential to be a drag on the economy. the boston fed ’ s statistical modeling suggests that a $ 20 increase in the price of a barrel of oil will shave roughly four - tenths of a percentage point off the rate of economic growth over two years, and cause the unemployment rate to be roughly two - tenths of a

- term inflation expectations remain stable and that food and energy price increases are not passing through to other prices. 7 given the important role of labor costs in a developed, services - focused economy such as the united states, it is important to closely monitor trends in labor markets. currently, wages the average annual expected price change they expect over the next 5 to 10 years. see for example the comments on commodity price pressures and monetary policy by my colleague william dudley, president of the new york federal reserve bank and vice chair of the federal open market committee : “ inflation expectations are well - anchored today and we intend to keep it that way. a sustained rise in medium - term inflation expectations would represent a threat to our price stability mandate and would not be tolerated. ” [ http : / / www. newyorkfed. org / newsevents / speeches / 2011 / dud110228. html ] bis central bankers ’ speeches and salaries are reflecting heightened unemployment, and show no evidence that potential inflation concerns are placing upward pressure on wages and salaries. core inflation rates tend to be a reasonable predictor of inflation in the intermediate term. core inflation remains well below my long - run target for inflation. this gives us flexibility to focus on accommodative monetary policy doing what it can to promote more rapid growth in the economy. as figure 18 illustrates, the percent of the adult population that is employed now is quite low in relation to recent history, and has shown only a slight improvement over the course of the recovery. so with significant slack in labor markets, stable inflation expectations, and core inflation well below our longer run target, there is currently no reason to slow the economy down with tighter monetary policy. until we make more progress on both elements of the federal reserve ’ s mandate – employment and inflation – the current, accommodative stance of monetary policy is appropriate. thank you. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches