One caveat that would cause Evans to “reassess my inflation outlook” would be if “medium term inflationary expectations were to rise,” he said.

“If inflation expectations were to start to creep up because of rising commodity prices or any other factor, the FOMC would consider this important development and act accordingly to keep inflation expectations well grounded,” he said.

“Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices that households actually pay. “Core inflation is not an objective in itself,” he added. “The only reason to look at core is as an indicator for headline.”

I think the evidence shows that over the past 25 years most supply shocks have been transitory – and have had no long-lasting imprint on longer term inflation, or on inflation expectations.

“Headline inflation is the ultimate objective of monetary policy with respect to prices,” Bullard said, noting that these are the prices households actually pay. “Core inflation is not an objective in itself,” he added. “The only reason to look at core is as an indicator for headline.”

Tarullo said looking at so-called core inflation, which strips out volatile food and energy items and remains below the Fed's informal 2.0% target, is better to set monetary policy, which acts with a lag.   "In the U.S. context ... it's proven a more appropriate metric since there's a better correlation between core inflation today and inflation tomorrow," Tarullo said.

As reported by Dow Jones

Federal Reserve Governor Daniel Tarullo said he sees no need to either terminate the central bank’s program of large-scale asset purchases before it’s scheduled to end in June or to increase its size.

As reported by Bloomberg News

[I]t is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.

I’ve argued that even if the fiscal authority borrows exclusively in its country’s own currency, the central bank can have a large amount of control over the price level. But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default. Such a commitment may expose the country to risks of short-term and medium-term output losses. How this trade-off should best be resolved awaits future research. But I suspect that it may be optimal for central banks to guarantee fiscal authority debts in some situations. If so, we again have to think of price level determination as something that is done jointly by the fiscal authority and the central bank.

Some fear that the strong rise in commodity and energy prices will lead to a more general sustained inflation. Yet, at the end of the day, such price shocks don’t create sustained inflation, monetary policy does.

With the potential for inflation expectations to be more volatile in the face of energy and commodity price shocks, I think it could be an opportune time for the FOMC to be more specific and publicly announce an explicit numerical inflation objective. Establishing an explicit inflation objective would clearly communicate our policy intentions and affirm our resolve to achieve price stability. It would also help the public to better evaluate the effectiveness of our actions as events unfold.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," Dudley said. "You have to look at the prices of all things."

This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment "tone deaf."

"I can't eat an iPad," another said.

As reported by Reuters

I want to contrast inflation to the cost of living. In casual language, we often interpret a rise in the cost of living as inflation. They are not the same thing. Cost-of-living increases are a result of increases in individual prices relative to other prices and especially relative to income. These relative price movements reflect supply and demand conditions and idiosyncratic influences in the various markets for goods and services. If some component of a household's cost-of-living basket goes up in price, the higher cost of living is not ipso facto inflation.

...

The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food or provide health care. We cannot prevent the next oil shock, or drought, or a strike somewhere —events that cause prices of certain goods to rise and change your cost of living.

Inflation is currently measured at lower-than-desired rates. A few months ago, fear of deflation was justified, but recently this concern has abated and the rate of inflation seems to have stabilized. Concern about inflation is rising because of higher gasoline prices and higher commodity prices, including food commodities. We are hearing stories that businesses incurring higher input costs may try to pass them through to retail prices. Higher input costs have not, however, translated to broad inflation of consumer goods and services. And, importantly, longer-term inflation expectations have stabilized in a healthy range. Through 2011 and 2012, I expect gradual firming of underlying inflation pressures from current very low levels to healthier levels.

Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less than that, which most FOMC participants see as consistent with the Federal Reserve's mandate.

[I]nflation is now on target, as far as I'm concerned. Over the last 12 months the price index for personal consumption expenditure has risen 1.5 percent, which is exactly what I've been recommending for the last six years. We also track a core price index that omits volatile food and energy prices, and it is sending the same message, having risen by 1.4 percent over the last 12 months. I believe that the Fed's best contribution to our nation's economic prosperity over time would be to keep inflation stable near the current 1.5 percent rate. But inflation has been lower this year, with overall inflation increasing at only a 0.7 percent annual rate, which is too low for me. I would point out that these inflation numbers often run hot or cold for several months at a time, which is why economists focus on the 12-month number I cited a moment ago. I am not yet convinced that inflation is likely to remain undesirably low. Moreover, the public's expectation of future inflation is not at such a low level; indeed, the latest survey from the University of Michigan puts the public's short-run inflation expectation at 2.2 percent. So I do not see a material risk of deflation — that is, an outright decline in the price level.

[T]he current circumstances are really extraordinary. It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy. That could be done through communication. I take our price stability mandate to be 2% inflation. We’re not at 2%. I foresee 2012 inflation as 1%. If we could indicate to the public that we want inflation to increase toward that price stability goal, that would serve to lower real interest rates given that short-term nominal interest rates are close to zero. Thinking about the fact that we’re running below our inflation objective and what it might mean to make up some part of that somewhere along the line, that would also give rise to lower real interest rates. Convincing the public that this is what we intend to do, that could be a useful tool.

Question:  New York Fed President William Dudley talked about making up lost ground on inflation later. You support that?

Evans: That is a potentially useful policy tool at this point and I definitely think we should study that more. That comes out of the literature.