stanley fischer : us inflation developments speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the federal reserve bank of kansas city economic symposium, jackson hole, wyoming, 29 august 2015. * * * accompanying charts can be found at the end of the speech. i am delighted to be here in jackson hole in the company of such distinguished panelists and such a distinguished group of participants. i will focus my remarks today on forces – domestic and international – that have been holding down inflation in the united states, 1 and some of the consequences of recent – primarily international – developments. although the economy has continued to recover and the labor market is approaching our maximum employment objective, inflation has been persistently below 2 percent. that has been especially true recently, as the drop in oil prices over the past year, on the order of about 60 percent, has led directly to lower inflation as it feeds through to lower prices of gasoline and other energy items. as a result, 12 - month changes in the overall personal consumption expenditure ( pce ) price index have recently been only a little above zero ( chart 1 ). the past year ’ s energy price declines ought to be largely a one - off event ( chart 2 ). that is, while futures markets suggest that the level of oil prices is expected to remain well below levels seen last summer, markets do not expect oil prices to fall further, so their influence in holding down inflation should be temporary. but measures of core inflation, which are intended to help us look through such transitory price movements, have also been relatively low ( return to chart 1 ). the pce index excluding food and energy is up 1. 2 percent over the past year. the dallas fed ’ s trimmed mean measure of the pce price index is higher, at 1. 6 percent, but still somewhat below our 2 percent objective. moreover, these measures of core inflation have been persistently below 2 percent throughout the economic recovery. that said, as with total inflation, core inflation can be somewhat variable, especially at frequencies higher than 12 - month changes. moreover, note that core inflation does not entirely “ exclude ” food and energy, because changes in energy prices affect firms ’ costs and so can pass into prices of non - energy items. inflation as measured by the consumer price index ( cpi ) generally sends the same broad message as does the pce price index ( chart 3 ). that similarity should not be surprising, because the cpi is

not appear to be causing the increase in longer - term rates. business and household borrowings valuation pressures are especially concerning if they are associated with excessive borrowing. if households or businesses borrow too much, they may be unable to service debt or could find themselves underwater if assets decline in value. such stresses can propagate through the financial system, causing funding shortages that curtail credit and hamper economic activity. of course, it ’ s very difficult to tell in real time whether households and businesses are, in fact, borrowing “ too much, ” so we rely on a range of benchmarks. currently, business debt is at historically high levels relative to such benchmarks as gross domestic product ( gdp ) or business assets, although those ratios are significantly lower than the record highs reached at the onset of the pandemic. however, measures of the ability of firms to service their debt remain strong overall, supported by - 5resilient corporate profits and limited effects to date from higher interest rates. the passthrough of higher interest rates into debt - servicing costs appears to be muted by the large share of long - term, fixed - rate liabilities. however, i note that for risky borrowers or those with high - yield or unrated debt, the ability to service their debt burdens has started to show signs of weakness, as would be expected in a rising interest rate environment, and could become further strained if corporate earnings fall due to a sharper - thanexpected slowdown in economic activity. the household sector, taken as a whole, looks quite resilient. household debt, including home mortgages, auto and student loans, and credit cards, remains at modest levels relative to gdp, and most of that debt is owed by households with strong credit histories or considerable home equity. of course, we are seeing emerging signs of stress for households with lower credit scores, and individual borrowers may struggle with debt burdens in the face of economic hardships. financial - sector leverage now to financial - sector leverage. as i mentioned earlier, we pay careful attention to our financial system ’ s ability to support the activities of businesses and households. when financial institutions are overly indebted, adverse shocks can cause them to retrench more than they otherwise would, resulting in greater declines in economic activity. in extreme circumstances, such effects can lead to credit crunches and widespread economic dislocations. similarly, some institutions may be forced to rapidly deleverage, stressing