In the near term, overall inflation will be affected by the substantial increase in energy prices...But this should be a transitory phenomenon.

[Oil prices] always pose a bit of a concern to the extent that sharp increases pass through to core inflation, but what we've seen over the past several years is pass-through that's fairly limited.

The real economy has performed very close to expectation at the beginning of 2004. The major surprise has been the large increase in energy prices. The market has interpreted this increase as a relative price change and not a sign of higher long-run inflation.

It now appears there has been more pass through of energy costs than I earlier expected. My point is that all of the inflation measures over the past seven or eight quarters show a similar—but distinct—upward tilt.

Shifts in relative prices, such as crude oil and import prices...can feed through fairly directly to the measures of core inflation through their effect on business costs, though their influence on inflation should be temporary unless they get built into labor costs or inflation expectations.

High prices, however, should not be confused with rising prices. Although there may be some continuing pass-through of higher energy prices into prices for other goods, energy itself should not be a source of long-continuing inflation pressure.

Inflation has picked up over the past year or so, but from very low levels and with much of the overall acceleration attributable to an increase in energy prices that should not be repeated any time soon.

Higher prices for oil and other commodities may lead producers to try to pass on some of their higher input costs, potentially exacerbating latent price pressures.

With oil prices now back above $50 a barrel, one can expect to see continued effects on headline and, to a lesser extent, core inflation.

Suppose oil prices stop rising and stay at their current high levels. Once the cost adjustments in the economy are complete, there will be no reason for prices to rise further, and inflation should return to its earlier rate...There would be a temporary spike in the overall inflation rate. This process, however, may take time to work through the economy, so that inflation may be elevated for more than a short period.

The potential volatility of energy prices, commodity prices, and (to a lesser extent) import prices has been dramatically demonstrated in recent years and so unexpectedly rapid increases--or decreases, for that matter--in producers' nonwage costs can by no means be ruled out. Cost increases that are both large and sustained would, of course, create inflationary pressure. Lagged effects on inflation of the nonwage cost increases that occurred in 2004 are also possible, particularly if the firming of demand increases pricing power and the ability of producers to pass on their higher costs. I can assure you that the Federal Reserve will monitor closely any developments affecting producers' costs.

If people begin to expect higher inflation because of the current impact of oil prices, we could face a kind of scaled down version of the devastating wage-price spiral we lived through in the 1970s. The good news is that evidence from financial market indicators, surveys, and recent patterns of labor compensation all indicate that long-term inflation expectations have been extremely stable. Presumably, this reflects the market’s view that the Fed will continue to demonstrate that it’s willing to do what’s necessary to ensure U.S. price stability.

At this broad trading range, the economy seems to be able to continue its expansion without any significant trouble...[but] if oil prices spike, it will have an implication both on production costs and on consumer spending.

Core inflation picked up about a percentage point in 2004, reflecting the pass through of rising oil and gas prices into core goods and services which use energy as an input to production. The decline in the dollar may have also contributed, though our estimates suggest there has been a very limited pass-though from this channel.

Monetary policy is capable of preventing oil price increases, or changes in the foreign exchange value of the dollar for that matter, from showing through to the underlying inflation rate.