Despite their historical importance for aggregate inflation, energy prices, for example are controlled for in only one of the structural [inflation] models discussed at this conference.  And this importance is not necessarily a concern of the past: Prices for oil and natural gas have soared since 2003, directly boosting the energy component of the consumer price index as well as raising the production costs, and ultimately to at least some degree the prices, of non-energy goods and services.  As a policymaker, I can assure you that any model of inflation that did not take account of these effects, and how they might or might not affect ongoing rates of inflation, would have been or little practical use to the FOMC over the past few years.

Luck as well as structural changes in the economy may have had a lot to do with the current low level and apparent stability of US inflation.  If so, and if our luck turns and we experience a series of adverse shocks, our ability to formulate policies that deliver sound performance may depend upon a much better understanding of the inflation process and of expectations formation.

Thus far at least, the growth effects of energy price increases appear relatively modest. The economy is much more energy-efficient today than it was in the 1970s, when energy shocks contributed to sharp slowdowns, and real energy prices remain below the peaks attained in the 1970s and early 1980s. Well-controlled inflation and inflation expectations have also moderated the effects of energy price increases, since those increases no longer set off an inflation spiral and the associated increases in interest rates, as they did three decades ago.

Many markets may perhaps be underpricing risks going forward.  Events of policy mistakes that heighten perception of risks could significantly alter current conditions.  In this regard, a resurgence in inflation could alter expectations about the path of short-term interest rates.  Signs that higher oil prices are weakening growth, along with the maturing of the credit cycle, could alter perceptions about credit quality and widen credit spreads.

[The personal consumption expenditures price index, excluding food and energy] rose by 1-3/4 percent over the last 12 months, suggesting that inflation has been relatively well-contained over the past year.  And core inflation has dipped a bit over the last few months.

It seems likely that, even with inflation expectations well contained—which they have been according to most indicators—higher oil prices may be partly passed through to core inflation at least for a time.

Supply disruptions emanating from the Gulf Coast disaster may...affect the prices of building materials and transportation services.

My overall assessment is that core inflation—that is, excluding food and energy—seems relatively well contained at the present time. However, there are a myriad of uncertainties about how things will unfold over the next year or two, and the uncertainties on the upside have only gotten bigger since Hurricane Katrina slammed into the Gulf Coast.

Two different measures of core inflation have given slightly different signals in recent months: one—the core CPI—is well within my comfort zone; the other—the core PCE—is at the upper end. However, I expect to see some moderation in inflation going forward.

I am intrigued by efforts to separate the extent to which the decline in risk premiums in recent decades is due to a reduction in inflation versus a reduction in real output volatility. In that regard, does the fact that most of the decline occurred by the end of the 1980s suggest that inflation control played a more important role than the damping of business cycles, which might reveal itself more gradually over time?

A flattening out of the prices of crude oil and natural gas, were it to materialize, would...lessen upward pressures on inflation.  Overall inflation would probably drop back noticeably from the rates experienced in 2004 and early 2005, and core inflation could hold steady or edge lower.

The effective productive capacity of the global economy has substantially increased, in part because of the breakup of the Soviet Union and the integration of China and India into the global marketplace.  And this increase in capacity, in turn, has doubtless contributed to expectations of lower inflation and lower inflation-risk premiums.

I expect inflation to remain well contained in 2005, both overall and by core measures.

While the recent inflation numbers have been good, and I share the general view that inflation is unlikely to be a problem in the near term, I believe that we must stay ahead of the curve to ensure that it does not become a problem in the long term.

In all likelihood, this investment cycle will unwind too with the arrival of higher rates. As this occurs the speculation present in some markets will eventually dissipate and prices will stabilize.