: for example, over the six months through april, the bis central bankers ’ speeches price index for personal consumption expenditures has risen at an annual rate of about 3 - 1 / 2 percent, compared with an average of less than 1 percent over the preceding two years. although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. so far at least, there is not much evidence that inflation is becoming broad - based or ingrained in our economy ; indeed, increases in the price of a single product – gasoline – account for the bulk of the recent increase in consumer price inflation. 1 of course, gasoline prices are exceptionally important for both family finances and the broader economy ; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the u. s. economy. an important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. i will discuss commodity prices further momentarily. besides the prospect of more - stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. first, the stillsubstantial slack in u. s. labor and product markets should continue to have a moderating effect on inflationary pressures. notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. thus the level of unit labor costs in the business sector is lower than it was before the recession. given the large share of labor costs in the production costs of most firms ( typically, a share far larger than that of raw materials costs ), subdued unit labor costs should remain a restraining influence on inflation. to be clear, i am not arguing that healthy increases in real wages are inconsistent with low inflation ; the two are perfectly consistent so long as productivity growth is reasonably strong. the second additional factor restraining inflation is the stability of longer - term inflation expectations. despite the recent pickup in overall inflation, measures of households ’ longerterm

of interest rates we need not just to focus on the level of bank rate. we need also to take account of the impact of the turmoil in the banking sector which is now leading to a fierce squeeze on credit especially in the housing market but not just there. the increase in bank margins over safe rates have offset the cuts we have made to bank rate since last summer and the tightening of other conditions have introduced some quantity restrictions which are not fully captured in price. our credit conditions survey suggests that this squeeze may intensify in the coming months. timely sources of data suggest that the economy is already slowing fast. the cips survey balances are now pointing to a contraction in activity in manufacturing, construction and services ( chart 4 ). house prices and transaction numbers are falling rapidly with direct effects on house builders and related services. and while there are winners as well as losers from lower house prices, there are signs that the housing market is affecting consumer confidence. more broadly, there are signs that the tightening of credit conditions is beginning to affect both consumption and investment. most importantly, the sharp increases in commodity prices are squeezing real take - home pay which is bound to impact on consumption at some point. conclusion i began this speech by highlighting how the recent events in financial markets have been facilitated by the integration of emerging economies into the global economy. of course, i could make an even closer link with rising commodity prices. the rapid expansion in activity in these economies has inevitably put pressure on the global price of energy and other raw materials, whose supply is relatively fixed at least in the short run. that is showing up in rising inflation world wide ( chart 5 ). so is it right to conclude, as some have, that the path of inflation is determined abroad? certainly commodity prices have an effect in the short run. but it is domestic monetary policy – the decisions that the monetary policy committee take each month, together with the overarching framework that defines our target – that determines the path uk inflation in the medium - run. the mpc will continue to assess the balance between the risks of higher inflation from the commodity cost shock and the downside risks to output ( and to inflation in the medium term ) from the credit crunch. but i can assure you that we will do whatever it takes to bring inflation back to target in the medium term. chart 1 : financial market liquidity chart 2 : eme holdings of fx reserves liquidity index 1. 0 per cent 0. 8 0. 6 0.