adjust policies if events prove us wrong. but for now, i believe the balance of the evidence points to the conclusion that the recent rise in inflation probably does not signal that the economy has been producing beyond its in the view of some observers, the argument that the federal reserve ’ s capacity measures overstate available slack has been lent some credibility recently by the much higher capacity utilization numbers published by the institute of supply management ( ism ). the differences between the ism and federal reserve ’ s estimates of operating rates likely lie in the definitions of capacity. the federal reserve ’ s measure assumes the availability of additional labor, if needed. the ism measures the capacity of plants to produce with their current labor force. in the wake of a significant cyclical contraction in manufacturing employment, such as we have experienced in recent years, a definition of capacity that relies on workers in place will indicate much less slack than a definition that does not include current labor as a limiting factor. since labor can be added relatively quickly, the federal reserve ’ s definition of capacity utilization seems more relevant for assessing effective slack in the manufacturing sector. sustainable potential, but rather that other causes have been at work. i now turn to these other causes. price shocks. quite a few prices have been pushed higher in recent quarters by special influences on the supply and demand for the specific products involved. such increases are probably contributing to the broad pickup in inflation that we have seen this year, but most likely they are not going to be a source of continuing upward pressure on prices. it is not surprising that the substantial strengthening of aggregate demand here and abroad has boosted prices for inputs into the production process, with the most noticeable effects on products for which the short - run supply is relatively price - inelastic. increases in commodity prices are typical as an expansion gathers momentum, but they have been unusually large in the current episode because of the synchronous strengthening here and overseas, especially in asia. petroleum prices have been under particular pressure, reflecting not only stronger demand but also risks that supplies could be constrained by terrorism or political disruption. the decline in the foreign exchange value of the dollar over the past year or so has contributed to the rise in the price of imports in the united states. the prices of core non - energy imports began to increase more rapidly than the general level of core consumer prices in 2003, and the difference widened in the first quarter of this year, adding to general price increases. in addition, the dollar ’ s decline has

deleveraging needs and better labour market conditions. furthermore, the recovery in business investment is supported by improvements in corporate profitability and the very favourable financing conditions. at the same time, euro area exporters are benefiting from the ongoing global economic expansion. these figures give some comfort as to the eu ’ s economic future. and i personally am confident that this trend can and will continue. however, challenges are looming : two particularly serious ones are brexit and euro area reform. the current, upbeat trajectory has to be harnessed as we set about mastering these historical challenges. 4. brexit looming the first challenge, brexit, began in june 2016, when the majority of uk voters decided to leave the eu. where are we now? brexit is definitely happening, and it is more and more likely to be a hard brexit – by which i mean that there will be a complete exit rather than a partial one. the uk and the eu will go their separate ways. since december of last year, there is a better chance of reaching a sensible agreement before the deadline of march 2019. the eucouncil agreed in december on the brexit divorce issues : basic compromises were reached on three fundamental questions, namely the rights of eu citizens in the uk after brexit ( and vice versa ), the border between ireland and northern ireland, and the uk ’ s financial contributions to the eu budget over the coming years. this compromise allows us to move forward to negotiate the terms of our future partnership. but let ’ s keep in mind that substantial progress has yet to be made on the details of the three 2 / 5 bis central bankers'speeches separation issues i just mentioned. now, since negotiations have been going rather slowly, there may be a transition period of two years from 2019 to 2021 – during which the old rules would still apply and the terms of the new partnership could be implemented. what kind of economic partnership this will be has yet to be determined. if no solution is found, the eu and the uk will trade under rules set by the world trade organization – which is in nobody ’ s interest, but is likely to be particularly harmful to the uk economy, while the economic impact on europe will be limited by comparison. take germany for instance. the uk is an important export market, accounting for ca. 7 % of german exports. but this implies only 2 % of value added to the german economy. my hope is that all the