The weak growth in productivity during 2001 and falling profits can also have a subduing effect on wage developments. During 2003 and 2004 the labour market situation is expected to gradually improve, which could contribute to a larger wage drift. A large part (70 per cent) of wages is determined at a local level. At the same time, inflation is expected to be slightly lower, which should have a subduing effect on the wage agreements signed. On average, wages are expected to increase by 4.1 and 4.3 per cent respectively during 2003 and 2004. Pricing and wage formation are influenced by inflation expectations among the different parties concerned, and therefore comprise an important part of the monetary policy analysis. Since March, households’ inflation expectations have remained around 2.5 per cent for one year ahead and the National Institute of Economic Research’s latest economic barometer shows that companies’ inflation expectations have remained more or less unchanged. (Diagram 5 - Actual inflation (CPI) as well as households’ and companies’ inflation expectations). In April, inflation measured in terms of CPI amounted to 2.5 per cent. The effects of the disturbances in supply that temporarily contributed to higher prices on energy and certain foodstuffs last year have abated, which has contributed to a decline in the inflation rate. In the short term, inflation is expected to continue to decline as these temporary effects disappear from the inflation measure. (Diagram 6 -  4  BIS Review 37/2002  Inflation. Outcome and main scenario).
Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending. It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy. The Federal Reserve has a dual mandate to promote maximum employment and price stability. These goals are intrinsically linked-price stability is essential to sustaining maximum employment over the long term and for the economy to reach its full potential. Right now, while there are some indications of gradual cooling in the demand for labor, the labor market remains very tight. Job growth continues to be robust. Job openings far outnumber applicants. And at 3.5 percent, the unemployment rate is near 50-year lows. That brings us to inflation. Inflation soared to a 40-year high of 7 percent last June, as measured by the personal consumption expenditures (PCE) price index. It has since  1/4  BIS - Central bankers' speeches  moderated to 5 percent, and the most recent data indicate that this trend of slowing inflation is continuing. Still, inflation is well above the FOMC's longer-run goal of 2 percent. This inflation target is an important bedrock principle for the FOMC. It provides a "North Star" for policy decisions and helps to improve the public's understanding of our goals and actions.1 We are committed to attaining-and maintaining-a sufficiently restrictive policy stance to achieve our 2 percent longer-run goal.