A sustained rise in medium-term inflation expectations would represent a threat to our price stability mandate and would not be tolerated. Nevertheless, we always need to be careful about inflation – even in an environment of ample spare capacity. Let me focus on one issue, commodity prices, for a moment. Surely some of the businesses in the audience have faced the challenge of sharply rising oil, food or metal prices in recent months. For example, the spot GSCI – a broad measure of commodity prices – has risen more than 35 percent over the past year. This was in train before the upheavals in the Middle East and Africa raised market concerns about potential disruption to oil supplies, pushing energy prices – though not other commodity prices – still higher. Commodity price pressures are pushing measures of headline inflation above measures of core inflation, which, as I mentioned, exclude food and energy prices. You may have concerns that the rise in commodity prices will turn out to be persistent and, if so, how this might impact the inflation outlook. 4  BIS central bankers’ speeches  From a policymaking standpoint, there are important factors that suggest that it would be unwise for the Federal Reserve to over-react to recent commodity price pressures by raising interest rates soon. Why? First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary – due to poor weather or geopolitical uncertainties. This is certainly what is anticipated by market participants.
Second, even if commodity price pressures were to prove persistent, they have a smaller impact in the United States than they do in many other countries. Relative to most other major economies, the U.S. inflation rate is lower, the amount of slack much greater and commodities represent a relatively small share of our consumption basket. This small share helps to explain why the “pass-through” of commodity prices into core measures of inflation has been very low in the United States for several decades. Third, the Federal Reserve’s success in anchoring inflation expectations has also been important in limiting pass-through. Since 1984, for example, when the Federal Reserve began to achieve success in driving down and then subsequently anchoring long-term inflation expectations, there has been very little evidence of commodity price pass-through into core inflation. In contrast, prior to 1984, when inflation expectations were much less wellanchored, pass-through did occur and, at times, played an important role in pushing underlying inflation higher. Thus, while rising commodity prices may be giving some of you a bad headache, they are not likely to lead to a sustained rise in inflation to levels inconsistent with our dual mandate. We will have to ensure, however, that these pressures do not cause inflation expectations to become unanchored.