You can think of monetary policy as a large gear that is connected to smaller gears representing different sectors of the economy. But not all gears move at the same pace. Some turn more quickly, while others are slower, meaning they experience longer lags between policy actions and effects. These effects of monetary policy are showing up in prices at different speeds. For example, the prices of globally traded commodities have already declined and are now well below levels we saw earlier last year. This reflects in part the effects of lower demand resulting from tighter monetary policy here and abroad. Similarly, prices for many goods have started to plateau or even decline, reflecting weaker demand, lower import costs, and an easing of global supply disruptions that developed during the pandemic. For example, prices of used cars-a big driver of inflation during the first year of the pandemic-have been retreating toward more normal levels over the past few months. The combination of the general rotation of demand from goods to services and the effects of higher interest rates on demand for goods should contribute to further downward pressure on the prices of many goods this year. 2/4  BIS - Central bankers' speeches  One gear that is moving at a far slower pace is the price of non-energy services. The ongoing imbalance between supply and demand in this sector continues to contribute to inflationary pressures. But there is some good news on this front as well.
Inflation Indications and Implications I'll start by saying that although we are seeing some signs that inflation is moderating, it remains far too high, and it is my No. 1 concern going into 2023. Rapidly rising prices continue to have an immense impact on families and businesses, especially when it comes to essentials like food, utilities, and housing. High inflation is a new reality for many people. For the three decades preceding the pandemic, the inflation rate averaged almost exactly 2 percent, as measured by the personal consumption expenditures (PCE) price index. But that changed dramatically in the spring of 2021, when inflation suddenly soared, ultimately reaching a 40-year high of 7 percent last June. While the inflation rate has since come down to 5-1/2 percent, it's still higher than any pre-pandemic reading since 1982 and far above the FOMC's 2 percent longer-run goal. Persistently high inflation undermines the ability of our economy to perform at its full potential, so it is critical for the Federal Reserve to bring inflation back down to our goal . We are firmly committed to doing so. 1/4  BIS - Central bankers' speeches  Shifts and Realignment Those who have been following my speeches lately will know that I've been quite devoted to a recurring theme: using the layers of an onion to describe inflation.1 But with the new year, I thought I would switch gears. I didn't have to look too far, because the mechanism of shifting gears is exactly what's going on in the economy.