of crude oil will fail to meet growing global demand. if crude oil prices rise further due to supply - side constraints, the global economy will be affected by a decline in real purchasing power in non - oil - producing countries, or by rising concerns over increasing inflationary pressures worldwide. in the united states, the federal reserve has gradually raised the targeted federal funds rate to above 4 percent. partly due to these monetary policy actions, the rise in the core consumer price index ( cpi ) has been contained. however, concern about inflationary risks is emerging due to such factors as the surge in crude oil prices. the current u. s. economic growth has been supported by relatively low long - term interest rates, which have been underpinned by well - contained long - term inflation expectations due to the appropriate conduct of monetary policy. should, however, price stability be undermined and the financial environment become destabilized, not only would growth in the united states slow, but the global economy could also be affected by abrupt changes in the international flow of funds. another issue that every country should address in an effort to achieve sustainable global economic growth from a slightly longer - term perspective is increasing global imbalances. at the meeting of the g - 7 countries held at the beginning of december in london, the view was shared that each country was taking steps to address these imbalances but more vigorous, mutually reinforcing action was needed. iv. developments in prices the environment influencing prices has been improving as the economy continues to recover. the output gap is likely to continue narrowing moderately, as the economy continues to recover at a pace slightly above its potential. the decline in unit labor costs is likely to slow along with the increases in wages, despite continued downward pressure from the rise in productivity. various survey results show that firms'and households'expectations regarding prices are gradually being revised upward. as for the potential growth rate, some argue that it is higher than previously estimated, and thus that the output gap is unlikely to narrow much. it should be noted, however, that a rise in productivity tends not only to expand production capacity but also to stimulate demand via increases in firms'expected growth and households'expected income. thus, the overall effect on prices of the rise in the potential growth rate varies depending on how these opposing mechanisms work over time. the impact of the expansion of emerging market economies on price developments is increasingly significant. it has been pointed out that the expanding production capacity of emerging market economies,

quarter basis ( chart 1 ). however, as an underlying trend, a virtuous cycle in which an increase in households ’ and firms ’ incomes leads to an increase in their spending seems to be operating firmly. first, with regard to the household sector, labor market conditions have been improving steadily, as seen in the unemployment rate declining to around 3. 5 percent, which is roughly the same level as the structural unemployment rate ( chart 2 ). in this situation, the rate of increase in wages has climbed moderately, registering around 1 percent ( chart 3 ). with an increase in the number of employees, employee income has been rising in the 2 – 3 percent range. amid the steady improvement in the employment and income situation, private consumption has been resilient as a trend, and the effects of the decline in demand following the front - loaded increase have been waning on the whole. moving on to the corporate sector, some weakness in production has remained, but there are prospects for further progress in inventory adjustments – mainly in industries relating to the bis central bankers ’ speeches production of durable consumer goods including automobiles, as well as to housing – by the end of the year. moreover, business sentiment has generally stayed at a favorable level ( chart 4 ). as seen in firms ’ business plans in the september 2014 tankan ( short - term economic survey of enterprises in japan ), plans for sales and profits were revised upward and there also were plans to increase business fixed investment ( chart 5 ). on this basis, the bank has judged that japan ’ s economy has continued to recover moderately as a trend. prices let me turn to prices. the year - on - year rate of change in the cpi excluding fresh food, which was minus 0. 5 percent in march 2013, immediately before introducing the qqe, subsequently turned positive and has risen to around 1¼ percent excluding the direct effects of the consumption tax hike ( chart 6 ). the determinants of the underlying trend of prices are the output gap and inflation expectations. since the current economic recovery is led by domestic demand, which tends to have large stimulative effects on employment, the output gap has been steadily improving, particularly on the labor front, and has recently been around zero, which is the past long - term average ( chart 7 ). judging from indicators obtained from the markets and various survey results, inflation expectations appear to be rising from a somewhat longer - term perspective, albeit with fluctuations ( chart 8 ). such