inflation expectations remain well contained. for example, the median expected inflation rate during the next five to ten years, as reported in the university of michigan's survey of consumers, has barely edged up in recent years, even as short - term inflation has been boosted by rising energy prices. meanwhile, inflation compensation for investors implied by the spreads between the rates on nominal and cpi - indexed treasury notes at both five - and ten - year maturities also has not shown any tendency to move higher on balance. in recent years, declining prices of imports and the threat of import competition have also probably held down costs and prices to a degree. moreover, increases in compensation costs have generally been modest. to be sure, average hourly earnings of production and nonsupervisory workers have been accelerating in recent quarters. however, the broadest measures of compensation have not picked up, suggesting that competition in labor markets has been intense. nonetheless, with labor markets tightening, some pickup in compensation increases for the broad measures would not be surprising. nor would a pickup necessarily be inflationary, given the very good growth in labor productivity that we have experienced in recent years. despite the relatively moderate increases in prices and costs that we have observed lately, the capacity utilization rate and the unemployment rate have recently reached zones that on occasion in the past have been associated with the beginnings of upward pressure on inflation. of course, the past is not always a good guide to the future, in part because a great deal of uncertainty surrounds the relationship of resource utilization and inflation. for instance, we cannot directly observe full capacity of either labor or production resources ; consequently, we can never be certain what level of activity represents the full utilization of capacity. in addition, measurement issues aside, the empirical evidence of the past half - century suggests that the relationship between utilization and inflation can shift over time. unfortunately, we typically are only imperfectly aware of the changes and their magnitudes in real time. in the 1990s, that relationship was affected by, among other things, changing trends in the growth rate of productivity and innovations in the structure of labor markets, such as increased use of temporary help supply. these uncertainties mean that we, as policymakers, need to keep not only an open mind about estimates of the economy's potential but also a close eye on the various indicators of costs and prices so that we can recognize incipient price developments and react to them as early as possible. but we also must recognize that, by the time evidence of

accelerating prices becomes definitive, containing inflation pressures could entail disruptive economic adjustments. so despite the uncertainties, we must evaluate all the evidence and make our best judgments about the oncoming risks to sustained good economic performance. in the current circumstances, as the federal open market committee has said, the economic climate appears to be one in which further increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures. the available evidence suggests that the pace of economic expansion may moderate a little from its average over recent quarters, keeping resource utilization in line with recent levels. maintaining economic growth around this pace will likely reflect a balancing of opposing forces. the rise in interest rates we have experienced will tend to restrain demand, offsetting the effects of sustained economic expansion in our trading partners and the reduced drag on u. s. growth from oil prices, assuming that those prices roughly flatten out as participants in futures markets seem to expect. if the past is any guide, the effect of rising interest rates is likely to be felt most visibly in housing markets. the rate for a thirty - year, fixed - rate mortgage is up 70 basis points from its level in the middle of last year, and one - year adjustable - rate mortgages have risen more than 100 basis points over the same period. in addition, house prices have increased considerably relative to rents, incomes, and returns on alternative assets. already there have been signs that housing demand has begun to moderate. sales of both new and existing homes are down substantially from their levels last summer, and information on mortgage applications and pending home sales point to further softening in the next few months. with demand slowing, house prices also seem likely to decelerate. indeed, we are beginning to see hints of moderation in some of the data on housing prices. as a consequence, spending for new housing construction, after contributing nearly 1 / 2 percentage point to overall gdp growth last year, may not increase much this year. moreover, the slowdown in house price increases could well hold back growth in consumption spending on a wide variety of goods and services. the rapid run - up in prices over the past few years and hence in household wealth, perhaps combined with the increasing ease of tapping that wealth, probably has been a major reason that households have been saving so little of their current flow of income. as house - price appreciation slows, the personal saving rate likely should begin a gradual ascent. to be candi