At some point, however, investors will have achieved the level of claims on oil that they seek. When that occurs, their demand will presumably stop rising, thus removing some of the current upward pressure on prices. Nonetheless, the increased value of oil imports has been a net drain on purchasing power, spending, and production in the United States. Moreover, higher oil prices, if they persist, are likely to boost core consumer prices, as well as the total price level, in this country. The recent modest declines in oil and natural gas prices may or may not signal a trend but are nonetheless welcome.

Monetary policy contributed to the oil price increases in the first place by creating an inflationary environment in which excess nominal demand existed for a wide range of goods and services. For example, in an important paper, Barsky and Kilian (2001) noted that the prices of many industrial commodities and raw materials rose in the 1970s about the same time as oil prices, reflecting broad-based inflationary pressures. Without these general inflationary pressures, it is unlikely that the oil producers would have been able to make the large increases in oil prices "stick" for any length of time.

We do know that as the rate of growth has slowed down, unit labor costs have gone up as they invariably do in such a period. But we've seen no evidence that those costs are being passed through into final prices in any material way. Similarly, we see a fairly extraordinary increase in energy costs. And here again, separating corporations into non-energy, non-financial, we've tried to trace the movement of energy costs into prices, and we've found that almost all does not going to final goods prices, but is squeezing profit margins, which is the same thing as unit labor costs.

From Q&A session, as reported by Bloomberg News