sustainable rates of production in some of the more secure and accessible oil fields, such as those in the north sea, have been declining. in view of these factors, estimates of long - term oil supplies have been marked down in recent months. long - dated oil futures prices have risen along with spot prices, suggesting that market participants also see oil supply conditions remaining tight for years to come. the decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. the precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. however, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices. another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. certainly, investor interest in oil and other commodities has increased substantially of late. however, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. but in fact, available data on oil inventories show notable declines over the past year. this is not to say that useful steps could not be taken to improve the transparency and functioning of the dominant role of commodity prices in driving the recent increase in inflation can be seen by contrasting the overall inflation rate with the so - called core measure of inflation, which excludes food and energy prices. core inflation has been fairly steady this year at an annual rate of about 2 percent. futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term. although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of non - energy, non - food finished goods and services seems thus far to have been limited. but with businesses facing persistently higher input prices, they may attempt to pass through such costs into prices of final goods and services more aggressively than they have so far. moreover, as the foreign exchange value of the dollar has declined, rises in import prices have put greater upward pressure on business costs and consumer prices. in

so hard under the pressure of competition and recession to become less rigid and more flexible have in fact done so. but those are all guesses - - or wishful thinking. we don ’ t know for sure. the price puzzle is why prices have been so well behaved in the face of labor costs that have been rising, albeit not especially fast. has the economy, as so many business anecdotes allege, really become more fiercely competitive both nationally and internationally? is the ability of firms to absorb labor cost increases without raising prices and without apparent reduction in profit margins confirming the hypothesis that productivity is rising faster than we thought, or faster than the admittedly inadequate data have been telling us? indeed, it is the productivity puzzle that may hold the key to the gratifyingly mysterious behavior of the economy. economists have thought for some time that the increasing importance of services in the economy is confounding the ability to understand what is happening to both product and productivity. we observed an increase in manufacturing productivity, but not in service productivity. indeed, measured productivity was generally negative in service industries even where anecdotal evidence indicated that processes had been streamlined, products had been substantially improved, as well as greatly proliferated, and the people in the industry believed they were doing a much more effective job serving their customers. economists freely admitted they didn ’ t quite know how to identify and measure the quality of the products that were being produced in service industries, sometimes even in manufacturing. economists also wondered aloud why all the investment in computers and information technology that was so obviously changing the world was not having an impact on productivity. we opined that maybe people weren ’ t using computers very well or that many things people were using computers for - - like editing everything to death or spelling things correctly - - were not actually contributing to productivity at least as we were measuring it. now, we should turn all this speculation - 4into a full court press to figure out what kind of data we need and what kind of analytical methods we need to invent in order to understand better what is going on in this economy. the need to improve the accuracy of the cpi has captured the attention of the press and the politicians because the indexing of benefits and tax brackets plays such a large part in the federal budget. but the problems of identifying what consumers are buying and how the quality of the items purchased has changed is very closely related to the problem of identifying what is being produced and what inputs are going