support of this view, figure 3 shows that nominal wage growth tends to broadly track price inflation over long periods of time. inflation that is persistently very low can also be costly, and it is such costs that have been particularly relevant to monetary policymakers in recent years. the most important cost is that very low inflation constrains a central bank ’ s ability to combat recessions. normally, the fomc fights economic downturns by reducing the nominal federal funds rate, the rate charged by banks to lend to each other overnight. these reductions, current and expected, stimulate spending and hiring by lowering longer - term real interest rates – that is, nominal in contrast, the fomc has determined that a number of considerations preclude it from setting a fixed numerical target for the other leg of its dual mandate, maximum employment. as discussed in its statement on longer - run goals and monetary policy strategy ( see note 1 ), the maximum level of employment is something that is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. moreover, the maximum level of employment, the longer - run “ natural ” rate of unemployment, and other related aspects of the labor market are not directly observable, can change over time, and can only be estimated imprecisely. as a result, views vary about what labor market conditions would be consistent with a normal level of resource utilization. for a general survey of the costs of high inflation, see briault ( 1995 ). english ( 1999 ) discusses costs associated with an increased need for cash management. for a discussion of costs that arise through interactions of inflation with the tax system, see feldstein ( 1997, 1999 ) and cohen and others ( 1999 ). finally, high inflation may adversely affect the economy ’ s allocation of resources by increasing the magnitude of misalignments in relative prices that result because firms do not continually adjust all of their prices ; for a discussion of such costs in the context of the new - keynesian model of inflation, see ascari and sbordone ( 2014 ). more broadly, if inflation evolves in an unpredictable manner over many years, then even financially sophisticated households and firms may not be able to avoid significant forecasting errors with their attendant costs. such costs can arise in a wide variety of situations ; for instance, any firm, union, or other entity that engages in a multiyear nominal contract may be adversely affected by unexpected increases

after having been soft last year. and a strengthening in economic growth abroad has provided important support for u. s. manufacturing production and exports. the housing market has continued to recover gradually, aided by the ongoing improvement in the labor market and mortgage rates that, although up somewhat from a year ago, remain at relatively low levels. with regard to inflation, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 1. 4 percent over the 12 months ending in may, up from about 1 percent a year ago but a little lower than earlier this year. core inflation, which excludes energy and food prices, has also edged down in recent months and was 1. 4 percent in may, a couple of tenths below the year - earlier reading. it appears that the recent lower readings on inflation are partly the result of a few unusual reductions in certain categories of prices ; these reductions will hold 12 - month inflation down until they drop out of the calculation. nevertheless, with inflation continuing to run below the committee ’ s 2 percent longer - run objective, the fomc indicated in its june statement that it intends to carefully monitor actual and expected progress toward our symmetric inflation goal. looking ahead, my colleagues on the fomc and i expect that, with further gradual adjustments 1 / 3 bis central bankers'speeches in the stance of monetary policy, the economy will continue to expand at a moderate pace over the next couple of years, with the job market strengthening somewhat further and inflation rising to 2 percent. this judgment reflects our view that monetary policy remains accommodative. ongoing job gains should continue to support the growth of incomes and, therefore, consumer spending ; global economic growth should support further gains in u. s. exports ; and favorable financial conditions, coupled with the prospect of continued gains in domestic and foreign spending and the ongoing recovery in drilling activity, should continue to support business investment. these developments should increase resource utilization somewhat further, thereby fostering a stronger pace of wage and price increases. of course, considerable uncertainty always attends the economic outlook. there is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization. possible changes in fiscal and other government policies here in the united states represent another source of uncertainty. in addition, although the prospects for the global economy appear to have improved somewhat this year, a number of our trading partners continue to confront economic challenges. at present, i see roughly equal odds that the u. s.