: for example, over the six months through april, the bis central bankers ’ speeches price index for personal consumption expenditures has risen at an annual rate of about 3 - 1 / 2 percent, compared with an average of less than 1 percent over the preceding two years. although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. so far at least, there is not much evidence that inflation is becoming broad - based or ingrained in our economy ; indeed, increases in the price of a single product – gasoline – account for the bulk of the recent increase in consumer price inflation. 1 of course, gasoline prices are exceptionally important for both family finances and the broader economy ; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the u. s. economy. an important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. i will discuss commodity prices further momentarily. besides the prospect of more - stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. first, the stillsubstantial slack in u. s. labor and product markets should continue to have a moderating effect on inflationary pressures. notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. thus the level of unit labor costs in the business sector is lower than it was before the recession. given the large share of labor costs in the production costs of most firms ( typically, a share far larger than that of raw materials costs ), subdued unit labor costs should remain a restraining influence on inflation. to be clear, i am not arguing that healthy increases in real wages are inconsistent with low inflation ; the two are perfectly consistent so long as productivity growth is reasonably strong. the second additional factor restraining inflation is the stability of longer - term inflation expectations. despite the recent pickup in overall inflation, measures of households ’ longerterm

worst financial crisis and the most severe housing bust since the great depression, and it faces additional headwinds ranging from the effects of the japanese disaster to global pressures in commodity markets. in this context, monetary policy cannot be a panacea. still, the federal reserve ’ s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. all of this has been accomplished, i should note, at no net cost to the federal budget or to the u. s. taxpayer. although it is moving in the right direction, the economy is still producing at levels well below its potential ; consequently, accommodative monetary policies are still needed. until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. at the same time, the longer - run health of the economy requires that the federal reserve be vigilant in preserving its hard - won credibility for maintaining price stability. as i have explained, most fomc participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer - term inflation expectations were becoming less well anchored, the committee would respond as necessary. under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the federal reserve ’ s mandate. bis central bankers ’ speeches