, the consumer price index for oer has risen about 4 percent, compared with 2 - 1 / 4 percent during the preceding twelve months. the acceleration in oer may reflect in part a shift in demand toward rental housing as families judged homeownership to have become less financially attractive of late. the most recent monthly increases in oer generally have been smaller than those earlier in the year, and further slowing may occur as the supply of rental units increases and the demand for owner - occupied housing stabilizes. however, the future evolution of this measure is difficult to know with any certainty. looking forward, core inflation seems likely to moderate gradually over the next year or so. some of the factors that pushed up core inflation in the recent past - in particular, energy prices and shelter costs - appear likely to be more neutral in the coming year, and inflation expectations remain contained. moreover, if, as seems most probable, the economy grows at a rate modestly below its potential for a time, pressures on resource utilization should ease a bit. however, as with the outlook for economic activity, there are substantial uncertainties about the inflation forecast. in the case of inflation, the risks to the forecast seem primarily to the upside. given the current level of inflation, a failure of inflation to moderate as expected would be especially troublesome. one factor that we are watching carefully is labor costs, which depend on both the compensation received by workers and labor productivity. although the available indicators give somewhat different signals, it seems clear that labor costs - which account for roughly two - thirds of firm's total costs - have been rising more quickly of late. some part of this acceleration no doubt reflects the current tightness in labor markets. for example, anecdotal reports suggest that businesses have been finding it difficult to recruit well - qualified workers in certain occupations. what implications does the pickup in labor costs have for price inflation? one possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms'profit margins and not be passed on to consumers in the form of higher prices. the fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. if higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour ; in the process, workers would capture a greater share of the fruits of the high rate of

might also impose greater restraint on consumer spending by reducing homeowners'equity and thus household wealth, and perhaps by affecting consumer confidence as well. because consumption makes up more than two - thirds of aggregate expenditure, any significant effect on consumer spending arising from further weakness in housing would have important implications for the economy. on the other hand, economic growth could rebound more vigorously than now expected. the solid rate of job growth, the decline in the unemployment rate, and the healthy pace of capital investment could be signals that underlying economic fundamentals are stronger than generally recognized. moreover, to date there is little evidence that the weakness in housing markets is spilling over more broadly to consumer spending or aggregate employment. if these trends continue, growth in real activity might return to a pace that could intensify upward pressures on resource utilization. potential output in my remarks today, i have alluded to the economy's underlying productive capacity - in the jargon of economists, " potential output. " the growth rate of potential output is the rate of growth that the economy can sustain in the long run. i will briefly discuss the factors determining potential output and the implications that the growth rate of potential output has for the economy and monetary policy. growth in potential output is determined to a large extent by two factors : the trend growth rates of the labor force ( that is, the number of individuals available to work ) and of labor productivity ( that is, the amount of output that each worker can produce ). with regard to the labor force, research by the board's staff highlights the role of demographic factors in determining the number of people available to work in the years just ahead. most notably, the impending retirement of the baby boomers and the fact that women are no longer increasing their participation in the labor force at the rate they were in the past will tend to restrain the future growth rate of the u. s. labor force. all else being equal, these developments translate into a slower rate of growth of potential output. estimates of the magnitude of the likely slowdown in labor force growth, particularly in the longer run, are subject to significant uncertainty. for example, to a degree that is hard to predict, improved health and increased longevity may increase the interest of older workers in remaining in the labor force, perhaps on a part - time basis, and an increasing scarcity of labor may prompt changes in labor - market institutions and employer behavior that facilitate the participation of older workers. but those adjustments are likely to take time,