On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures, slowed to 2.3 percent in February from a recent peak of 2.9 percent last September. Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year.

I’m just reporting what I hear on the street, which is a real concern that with our expanded balance sheet, we are just a little bit in an ember of what could become an inflationary fire.

"You know, I am a hawk on inflation. But that is, inflation has been coming down, not going up,” Fisher said. “I watch this like a hawk, because this is my little part of the aviary at the Federal Reserve system. I’m perched, ready to pounce on inflation. I don’t see that as the problem presently.”

Whether the increase in gasoline prices, and energy prices more broadly, turns into a persistent inflation problem depends critically on the evolution of inflation expectations. Last year, as actual inflation accelerated and decelerated, survey measures and financial market indicators of inflation expectations remained relatively stable, which limited the influence of the price shocks we saw a year ago. If, as I expect, inflation expectations remain stable in response to the recent run-up in gasoline prices, their influence on overall inflation should be limited as well.

After a brief run-up during the second quarter of 2011—reflecting the pass-through from higher commodity prices and supply-chain disruptions—inflation has retreated and may be headed down further.

Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

Looking ahead, I expect inflation to ease to about a 1½ percent annual pace next year. This is somewhat below the 2 percent level that I see as the appropriate medium-term goal. My expectation that inflation will fall reflects the fact that the economy is performing so far below its potential. Such economic slack tends to depress inflationary pressures. It means that workers have very limited ability to demand higher wages and businesses can’t push through price increases that will stick. For example, the latest report showed that wages grew around 2 percent over the past year, hardly a prescription for high inflation. In addition, surveys show that expectations for inflation remain stable.

"If inflation risks materialize, I think we would need to respond by initiating exit even if growth remained disappointing," Lacker told reporters following a speech. Lacker said the consensus is for the economy to rebound in the second half of the year and for inflation to trend down to around 2%. Lacker said he was pretty comfortable with the inflation outlook now but that there was an upside risk to the inflation outlook. "There is going to be a risk of a step-up in inflation trends. We have seen that over the last nine months. Whether that is finished playing out or not, we don't have the data yet," he said. "I am hoping and expecting inflation to stabilize at around a 2% trend but there is the risk that it would continue to accelerate," he said. Lacker said he was comfortable with the current stance of policy but added that "I think we are going to have to watch carefully."

As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation.

I think businesses are going to have a tough time pricing what goes out the door to make up for what comes in the door.  We know that pressure is there.  We'll have to see if the consumer will allow them to get away with it.

I believe inflation will be temporarily elevated this year due to developments in oil and food prices, but I expect inflation to fall back below 2 percent in the next couple of years.

“The rise in gasoline prices is really troubling to everyone,” Dudley said today in response to audience questions after a speech in Fishkill, New York. “So far, the pass through of higher energy prices seems to be very modest. That is consistent” with the historic trend.

“We will do whatever we need to do to keep inflation in check over the medium to long term,” Dudley said. “It is important we don’t overreact” to the temporary increase in food and energy prices.

Slow progress in closing resource gaps and a medium-term outlook for inflation that is too low lead me to conclude that substantial policy accommodation continues to be appropriate.

If the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future. As always, we will study the incoming information on the state of the economy. While my expectation is that oil price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside. In this environment, we must have a plan in place to begin normalization of monetary policy. Depending on how economic conditions evolve, we must be prepared to act as aggressively as necessary if we are to promote effectively our long-run goals of price stability and maximum employment.

Provided [commodity] prices stabilize (or indeed retreat), I would expect headline inflation to move back to a mandate-consistent rate.