data, is now estimated to have been about 3. 7 million barrels per day higher than the iea projected in july 2003. 6 ( for reference, total global oil consumption this year has averaged about 81 million barrels per day ). a significant part of this unexpected increase in oil consumption, about 2. 2 million barrels per day, reflected quickly growing oil demands in east asia, notably china. however, an ongoing economic expansion across both the industrialized and the emerging - market economies has also contributed to the world ’ s growing appetite for oil. on the supply side, the production of oil has been constrained by the available capacity and by geopolitical developments. with oil consumption and prices rising briskly, saudi arabia and other members of the organization of petroleum exporting countries ( opec ) have promised to pump more oil. however, the relatively limited increases in production delivered so far by opec members, together with non - opec production that has fallen a bit below projections, have raised concerns that the spare production capacity available in the near term may be severely limited, perhaps below 1 million barrels per day. interacting with the limits on capacity, and contributing to the exceptional volatility in oil prices of recent months, are uncertainties about the reliability and security of oil supplies. of course, the oil - rich middle east remains especially volatile. but political risks to the oil supply have emerged in nations outside oil futures and other oil - related derivatives are traded on the new york mercantile exchange ( nymex ) and the international petroleum exchange ( ipe ) as well as over the counter. i should acknowledge that oil futures prices have a less - than - stellar record in forecasting oil price developments, but they are probably the best guide that we have. chinn, leblanc, and coibion ( 2001 ) find that futures quotes are unbiased predictors of future spot prices, though not very accurate ones. saudi arabia and other opec members, like the iea and most participants in the oil markets, did not anticipate the surge in consumption we have seen this year either. opec actually reduced its production targets in 2003 and again in early 2004 out of concern that weak oil demand would cause price declines. the middle east as well, including russia, venezuela, and nigeria. weather also has taken a toll, as recent hurricanes affected the production and distribution of oil on the u. s. gulf coast. because neither the demand for nor the supply of oil responds very

all types of shocks and can at times be misleading about what is happening to the underlying rate of overall inflation. and if increases in headline inflation prove more persistent than initially expected, central bankers must be vigilant to ensure that they do not become embedded into expectations and thereby generate substantial second - round effects on inflation. finally, because price stability ultimately involves control of overall, headline inflation, which after all is the inflation measure that households really care about, central bankers should and do pay attention to headline inflation as well as to core inflation measures. a core inflation measure should not be seen as a substitute for thorough and careful analysis of the forces that are driving our economy and the inflation process. more details on inflation forecasting at the board are in bernanke ( 2007 ). references aoki, kosuke ( 2001 ). " optimal monetary policy responses to relative price changes ", journal of monetary economics, vol. 48 ( august ), pp. 55 - 80. armour, jamie ( 2006 ). " an evaluation of core inflation measures ", bank of canada working paper 2006 - 10 ( ottawa : bank of canada, march ). bagliano, fabio c., and claudio morana ( 2003 ). " measuring u. s. core inflation : a common trends approach ", journal of macroeconomics, vol. 25 ( june ), pp. 197 - 212. bean, charles ( 2006 ). " commentary : impact of globalization on monetary policy ( 40 kb pdf ) ", speech delivered at the federal reserve bank of kansas city 30th annual economic symposium, jackson hole, wyo., august 26, www. kansascityfed. org / publicat / sympos / 2006 / sym06prg. htm. bernanke, ben s. ( 2007 ). " inflation expectations and inflation forecasting ", speech delivered at the monetary economics workshop of the national bureau of economic research summer institute, cambridge, mass., july 10, www. federalreserve. gov / newsevents. blinder, alan s. ( 2006 ). " monetary policy today : sixteen questions and about twelve answers ", in s. fernandez de lis and f. restoy, eds., central banks in the 21st century. madrid : banco de espana, pp. 31 - 72. bodenstein, martin, christopher erceg, and luca guerrieri ( 2007 ). " optimal monetary policy in a model with distinct core