Personally, my comfort zone for core inflation is between 1 and 2 percent—that's the range of inflation rates I consider to be consistent with price stability. But that doesn't mean that I view the 1 to 2 percent range as a "zone of indifference." I think it's better to be in the middle of the range. In fact, some research suggests that an inflation figure of about 1.5 percent strikes a good balance between avoiding the negative effects of inflation with the value of being able to push short-term real rates into negative territory in periods when the economy is weak.

Solid underlying trends in productivity should keep overall production costs in check. But, as I mentioned earlier, there are risks to the inflation outlook—namely, the potential for energy cost pass-through, pressures from increases in resource utilization, and rising inflationary expectations. With inflation at the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern, while a decline in inflation would be beneficial. So I think monetary policy should be calibrated to bring us back to the middle of the range over time.

Technological progress, along with the transition to greater labor force participation in emerging and developing economies has probably served to keep inflation low in many other countries and has served to increase the rate of growth in potential output globally. But the rapid growth in the market sectors of emerging and developing economies may also contribute to more rapid growth in global demand and inflation pressures. This changing configuration of world markets complicates the task of forecasting inflation and output within national economies.

Energy prices have surprised us over the past few years, in terms of the extent of the rise in prices, the increase in volatility, and the limited negative effects to date on global economic growth. Our capacity to project future energy prices has proven to be very limited, as has our ability to convincingly ascertain the extent to which temporary supply factors, rather than an unrecognized strength in global demand, accounts for the energy price trajectory we've witnessed recently.

With respect to monetary policy, I find nothing either in theory or the existing empirical evidence to overturn the conclusion that a country like the United States, operating under a flexible exchange rate regime, can ultimately achieve the inflation target of its choice.

Without the contribution of the global workforce, moreover, the quantity and variety of goods and services available in the United States would diminish. I have argued, within the temple of the Fed and without, that globalization has in these and many other ways expanded our concept of “capacity constraints” and redefined our sense of “resource utilization.” It has helped tame inflation. That has been the trend of recent years. But it has not exorcised for once and for all time the demon of inflation.

Core CPI was 2.8 percent for the first three months of 2006, and another measure we often use, core personal consumption expenditures, or core PCE, was about 2 percent measured on a year-over-year basis. On the other hand, three- and six-month measures have edged up recently. While these measures are still relatively low, I don’t want to see inflation move measurably higher.

Our focus on core is mostly a technical thing because, generally speaking, energy and food prices are more volatile and tend to respond, tend to stabilize more quickly than other parts of the inflation basket.  That hasn't been true lately, as you know.  And we really need to pay attention, I think, to the overall inflation rate as well as the core inflation rate.

It seems that the most likely outcome over the next year or so is that inflation will remain contained, although there are risks, and I think they are tilted slightly to the upside.

Apparently, we haven't had much in the way of pass-through from past increases in energy and commodity prices to core inflation yet, but I wouldn't be surprised if some modest amount were evident in the next couple of quarters.

Although inflation is in the upper portion of my comfort zone, it appears to be well contained at present, and my best guess for the future is that it will remain well contained.

I like to look at the inflation directly rather than the unemployment rate. If you look at a chart that plots unemployment rate or changes in unemployment rate against inflation there is only the very, very weakest of relationships there. It's just not an adequate indicator for monetary policy purposes in the short run.

Six months ago...the energy price surge had led some observers to expect to see those prices pass through to a broad range of prices of goods and services, much like what happened in the 1970s. But that hasn’t happened. Core inflation has been low and relatively steady in the last several years. Our preferred inflation measure, the price index for core personal consumption expenditures, has risen 1.8 percent over the last 12 months. Despite rising energy prices, core inflation actually fell slightly last year, since the core price index had risen 2.2 percent in 2004. Similarly, we are not seeing any sign of rising inflation in the most recent data.

This relatively low unemployment number [4.8%] raises the question of whether the economy has already gone a bit beyond full employment. If it has, then, with real GDP growth expected to exceed its potential rate in the first half of this year, the strain on resources could build further, intensifying inflationary pressures. Additional inflationary pressures at this point would be particularly unwelcome, because inflation is now toward the upper end of my “comfort zone.”

While we face a great deal of uncertainty, the economy appears to be approaching a highly desirable glide path. First, real GDP growth currently appears to be quite strong, but there is good reason to expect it to slow to around its potential rate as the year progresses. Second, it appears that we are operating in the vicinity of “full employment” with a variety of indicators giving only moderately different signals. Finally, inflation is near the high end of my comfort zone, but it appears well contained at present, and my best guess for the future is that it will remain well contained.