require a greater reliance by our trading partners on their own domestic spending as a source of growth. consumer price inflation has been elevated so far this year, due in large part to increases in energy prices. core inflation readings - - that is, measures excluding the prices of food and energy - - have also been higher in recent months. while monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long - run growth. for example, at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3. 2 percent over the past three months and 2. 8 percent over the past six months. for core inflation based on the price index for personal consumption expenditures, the corresponding three - month and six - month figures are 3. 0 percent and 2. 3 percent. these are unwelcome developments. although the rate of pass - through from the higher prices of energy and other commodities to core consumer price inflation appears to have remained relatively low, the cumulative increases in energy and commodity prices have been large enough that they could account for some of the recent pickup in core inflation. despite recent increases in spot oil prices, futures markets imply that oil prices are not expected to continue rising. the realization of that outcome would reduce one source of upward pressure on inflation. however, the volatility of these and other commodity prices is such that possible future increases in these prices remain a risk to the inflation outlook. subdued growth in most broad measures of nominal labor compensation and the ongoing expansion of labor productivity have held down the rise in unit labor costs, the largest component of business costs. anecdotal reports suggest, however, that the labor market is tight in some industries and occupations and that employers are having difficulty attracting certain types of skilled workers. finally, some survey - based measures of longer - term inflation expectations have edged up, on net, in recent months, as has the compensation for inflation and inflation risk implied by yields on nominal and inflation - indexed government debt. as yet, these expectations measures have remained within the ranges in which they have fluctuated in recent years, but these developments bear watching. with the economy now evidently in a period of transition, monetary policy must be conducted with great care and with close attention to the evolution of the economic outlook as implied

abroad helped spur a robust expansion in u. s. real exports, which grew about 9 percent last year. the pattern of real u. s imports was somewhat uneven, partly because of fluctuations in oil imports over the course of the year. on balance, import growth slowed in 2006, to 3 percent. economic growth abroad should support further steady growth in u. s. exports this year. despite the improvements in trade performance, the u. s. current account deficit remains large, averaging about 6 - 1 / 2 percent of nominal gdp during the first three quarters of 2006 ( the latest available data ). overall, the u. s. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. such an outlook is reflected in the projections that the members of the board of governors and presidents of the federal reserve banks made around the time of the fomc meeting late last month. the central tendency of those forecasts – which are based on the information available at that time and on the assumption of appropriate monetary policy – is for real gdp to increase about 2 - 1 / 2 to 3 percent in 2007 and about 2 - 3 / 4 to 3 percent in 2008. the projection for gdp growth in 2007 is slightly lower than our projection last july. this difference partly reflects an expectation of somewhat greater weakness in residential construction during the first part of this year than we anticipated last summer. the civilian unemployment rate is expected to finish both 2007 and 2008 around 4 - 1 / 2 to 4 - 3 / 4 percent. the risks to this outlook are significant. to the downside, the ultimate extent of the housing market correction is difficult to forecast and may prove greater than we anticipate. similarly, spillover effects from developments in the housing market onto consumer spending and employment in housingrelated industries may be more pronounced than expected. to the upside, output may expand more quickly than expected if consumer spending continues to increase at the brisk pace seen in the second half of 2006. i turn now to the inflation situation. as i noted earlier, there are some indications that inflation pressures are beginning to diminish. the monthly data are noisy, however, and it will consequently be some time before we can be confident that underlying inflation is moderating as anticipated. recent declines in overall inflation have primarily reflected lower prices for crude oil, which have fed through to the prices of gasoline, heating oil, and other energy products used by consumers