As the result, prices of metals and energy commodities have doubled since the end of 2004. Although prices of these products do not affect consumer inflation directly, in the medium term will contribute to further increase of inflation volatility. The tail wind of globalization will probably return in the medium run, but structural adjustments, which may take several years, must be completed first. Rising white collar and industrial wages in emerging markets will attract more and more people to the labour market and will consequently lead to adjustments in education systems in those countries. Labour force “great doubling” 3 , together with significant increase of the quality of human capital due to better education system will contribute to further increase of offshoring directed to still cheaper emerging markets. Offshoring, as a strategy of increasing competitiveness, is becoming more and more common and includes not only the manufacturing of products but also – increasingly – services. Numerous analyses show that the process of offshoring is bound to grow and increasingly affect services 4 . For example, McKinsey Global Institute estimated that in 2008 ca. 160 million jobs in services, i.e. 11% of the global employment in services estimated at 1.46 billion, may theoretically be performed at a distance from the customer. It is hard to forecast, however, what the global consequences of such situation will be. On the one hand, offshoring lowers operational costs of enterprises and thus optimal mark-up pricing allows to reduce prices.
Although the appreciation of the dollar is likely to cause some further softness in import prices, the continued decline in resource slack as the economy expands should push in the opposite direction. In addition, longer-term household inflation expectations have been well maintained through this period of very low inflation, as indicated by our Survey of Consumer Expectations. The combination of stable expectations and declining slack should push inflation slowly back towards the FOMC’s objective. Monetary policy As the FOMC has consistently communicated, the timing of lift-off will depend on how the economic outlook evolves. As I have discussed, the labor market has improved substantially and I expect to see inflation begin to firm later this year. If this labor market improvement continues and the FOMC is reasonably confident that inflation will move back to our 2 percent objective over the medium-term, then it would be appropriate to begin to normalize interest rates. At the March meeting, the FOMC removed language from the statement that indicated that we would be patient in beginning the process of normalizing monetary policy. But, as Chair Yellen remarked in her most recent press conference, removal of “patient” from the statement does not indicate that we will be “impatient” to begin to normalize monetary policy. Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated. Whenever the data support a decision to lift off, I think it is important to recognize what this would signify.