Before turning to issues occupying center stage at present, I want to address a long-running issue that I discussed here last year: tracking the “stars” that serve as guideposts for monetary policy. 10 These include u*, the natural rate of unemployment, and r*, the neutral real rate of interest. Unlike celestial stars, these stars move unpredictably and cannot be directly observed.
If so, the drag on real income and spending from rising energy costs should diminish over time, as should the risk of additional energy cost pressure on underlying, or "core," inflation. The general contour of economic activity that most forecasters are expecting, in which they see little change in resource utilization over the year, should be consistent with relatively stable core inflation.