[Low inflation or price stability] is sometimes taken for granted but is probably the single most important factor in our country’s strong and long-lasting economic growth over the past two decades.

As a policymaker, these anecdotal reports [of price increases] remind me to stay alert. But it’s important to keep in mind that isolated price increases are not the same as an unwelcome rise in average prices as measured by our inflation indexes. Because of fierce competition, many businesses that compete globally are in fact reluctant to pass along higher input costs. These pressures have made price increases for domestic services more prevalent than those for consumer goods.

As we keep an eye on prices, it’s important to keep in mind that monetary policy acts with a considerable lag, and economic circumstances can and do change quickly. If you wait to see concrete evidence that inflation has taken hold, then it’s already too late to stop it.

To illustrate my point, let me use a football analogy. That is, the best defense is a good offense that maintains control of the ball. What does that mean for the Federal Reserve? I believe it means we must constantly anticipate and act to prevent problems from emerging. And if we are successful, we should never see problems with out-of-control rising prices. Our opponent is an unwelcome level of inflation, and in that game we don’t want to play catch-up.

After going through a foggy stretch of road with potholes and sharp turns, the economy seems to be in a stretch of more open highway. While there can always be surprises around the next corner, I would add that my near-term forecast is for more of the same: GDP growth in the 3 to 4 percent range, continued strong business spending growth, steady employment gains along with a continuing decline in the unemployment rates and low inflation as measured by the Consumer Price Index in the range of 2 ½ to 3 percent.

The trick to guarding against an unwelcome run-up of inflation is to prevent the spread of price increases across sectors where they show up in a basket of all prices. And that means preventing the emergence of the expectation of rising inflation, an insidious cycle where people rush to buy before prices rise further. In my view, the policy path we’ve been on has helped to restrain inflationary pressures—at least for now.

Deficits can indeed be a problem...Real interest rates could rise as government deficits crowd out business and consumer investment. But...there is no need for deficits to be inflationary. The prospect of inflation arises only if the central bank tries to resist the rise in real interest rates, thereby keeping its policy rates too low and inadvertently easing monetary policy.

Business people I talk to continue to say they continue to see some rising input costs.  But they are not able to fully translate these rising costs into their own prices.

The US economic expansion has firmed, overall inflation has subsided, and core inflation has remained low.

One risk [to the inflation outlook] is that there is a good deal of uncertainty about the actual extent of slack that remains in the labor market. Another relates to the possibility of further movements of important relative prices—especially the price of oil and the foreign exchange value of the dollar. A third risk is that firms’ markups of prices over unit labor costs, which are now exceptionally high, could revert to more normal levels. This could result in a significant reduction in the rate of inflation.

A reasonable estimate for trend productivity growth going forward is about 2-1/2 percent per year...And although it would represent a slowing of the outsized, and unsustainable, gains we’ve seen since [the 1995 to 2001 period], it appears fast enough to maintain the favorable inflation results we’ve had in recent years.

If productivity accelerates or decelerates, we could see inflation start to fall or rise relative to the 1-1/2 to 2 percent rate that prevails today.

The predominant medium-term effect of a slowdown in productivity growth would likely be higher inflation.

Low inflation is the most important contribution the Fed can make to sustained economic expansion and living standards...[Unchecked inflation causes] arbitrary distribution of incoming wealth--the winners are lucky, the losers are unfortunate.

[Inflation] leads to resource misallocation.  With resource misallocation will come sub-par economic growth, and what really matters to economic well-being over time is the trend rate of growth.