came in at 2. 6 percent in july, again remaining well above our 2 percent goal. in addition, the latest consumer and producer price index reports suggest that 12 - month core pce inflation in august was likely a touch above the july reading. the persistently high core inflation largely reflects 1 / 5 bis - central bankers'speeches pressures on housing prices, perhaps due in part to low inventories of affordable housing. the progress in lowering inflation since april is a welcome development, but core inflation is still uncomfortably above the committee's 2 percent goal. prices remain much higher than before the pandemic, which continues to weigh on consumer sentiment. higher prices have an outsized effect on lower - and moderateincome households, as these households devote a significantly larger share of income to food, energy, and housing. prices for these spending categories have far outpaced overall inflation over the past few years. economic growth moderated earlier this year after coming in stronger last year. private domestic final purchases ( pdfp ) growth has been solid and slowed much less than gross domestic product ( gdp ), as the slowdown in gdp growth was partly driven by volatile categories including net exports, suggesting that underlying economic growth was stronger than gdp indicated. pdfp has continued to increase at a solid pace so far in the third quarter, despite some further weakening in housing activity, as retail sales have shown further robust gains in july and august. although personal consumption has remained resilient, consumers appear to be pulling back on discretionary items and expenses, as evidenced in part by a decline in restaurant spending since late last year. low - and moderate - income consumers no longer have extra savings to support this type of spending, and we have seen loan delinquency rates normalize from historically low levels during the pandemic. the most recent labor market report shows that payroll employment gains have slowed appreciably to a pace moderately above 100, 000 per month over the three months ending in august. the unemployment rate edged down to 4. 2 percent in august from 4. 3 percent in july. while unemployment is notably higher than a year ago, it is still at a historically low level and below my and the congressional budget office's estimates of full employment. the labor market has loosened from the extremely tight conditions of the past few years. the ratio of job vacancies to unemployed workers has declined further to a touch below the historically elevated pre - pandemic level - a sign that the

half of 2003, the bls procedure may overstate the deceleration in rents net of utilities and hence in owners'equivalent rent. as a result, on this particular count, the slowdown in cpi inflation may have been slightly overstated in the first half of 2003. if so, the stabilization in residential energy costs in the second half of 2003 should unwind this effect and likely add a bit to measured inflation going forward. another example of a special factor affecting measured inflation arises from the fiscal problems of state and local governments : to cover rising budget deficits, a number of public university systems have announced large tuition price hikes for the upcoming academic year. these tuition hikes will naturally affect the measured cost of living. as one - time events that are more fiscal than monetary in nature, however, i do not consider them particularly important from a monetary policy point of view. a similar effect was seen in the increase in the july cpi number, which was partly attributable to a rise in tobacco excise taxes imposed by a number of states. other examples arise because of lags in data collection : for example, telephone rates are incorporated into the cpi only with some lag, so that rate increases that occurred earlier this year will not be reflected in the index for a few months yet. i alert you to some of these special cases only to illustrate why the federal reserve does not react to monthto - month changes in inflation data, or any other series for that matter. for assessing the inflation forecast for the longer run, in this case the year 2004, one has to turn to the underlying economics. i do not disagree with the general tenor of the private - sector forecasts and the fomc projections. it seems plausible that the combination of a strengthening recovery, well - anchored inflation expectations, and a monetary authority strongly committed to stabilizing inflation will serve to keep inflation in the projected range. however, in my view, the most likely outcomes are in the lower part of that range, and i believe that the risks remain to the downside. the reason is that ongoing productivity growth, together with stepped - up capital investment, may enable producers to meet expanding demand without substantially increased hiring in the near term, with the result that labor markets remain soft. indeed, as i have noted, several of the private - sector forecasters project unemployment rates still near 6 percent in the fourth quarter of 2004, despite real growth approaching 4 percent for the second half of 2003 and all