CPI and PPI core inflation rates remain contained and wage growth is moderate, both in the U.S. as well as in Europe. Moreover, despite near-record global economic growth in 2004, there are substantial unutilized capacities in the U.S., Japan, and Europe. As a result, despite record oil prices a few weeks ago, global inflation expectations appear to be well anchored. The growth outlook for Switzerland remains constructive, supported by an expansionary monetary policy stance. The rise in oil prices has, however, dampened domestic demand. Weakness in Germany and, more recently, in France are exacerbating the situation. Economic growth is unlikely to accelerate into 2005. Upward pressure on the exchange rate may exert additional unwelcome downward pressure on aggregate demand. Some slack in Swiss labor and product markets is likely to prevail. The output gap will close in 2006 at the earliest. In such an environment, it will take time for the unemployment rate to decline from the current 3.7%. Real wage growth is well contained with growth rates fluctuating around 1% per year since 2001. Core inflation rates remain moderate at around 1%. Despite substantially higher oil price related CPI and PPI inflation since August of this year, longer-term inflation expectations remain firmly anchored as swap spreads and consensus  4  BIS Review 69/2004  forecasts confirm. The growth rates of Swiss monetary aggregates and the development of credit confirm the overall picture of a moderate inflation outlook.
2  For a survey on the literature on speculators and their impact on price developments in the oil market, see Weiner, R, (2002): “Sheep in wolves’ clothing? Speculators and price volatility in petroleum futures”, Quarterly Review of Economics and Finance, 42 (2), 391-400. 2  BIS Review 69/2004  at 35 USD per barrel for WTI delivery in 5 years (see Figure 7). Moreover, despite the most recent sharp correction in spot prices from 55 to 46 USD per barrel WTI, long-dated futures prices have receded only marginally. Since 2002, prices of oil futures are generally quoted below expected spot prices - a state labeled backwardation. Backwardation implies uncertainty about production and supplies and effectively favors further inventory draw downs (see Figure 8). Price information extracted from the market appears to confirm that at least for the time being, average oil prices are likely to remain elevated compared to historical price ranges. Forecasting market prices is an inherently difficult endeavor. Immense uncertainties on the supply side make oil price forecasts particularly challenging. Reserve figures can be increased rapidly by the discovery of new oil fields or by exploitation at greater margins due to new technologies. Proven oil reserves in the Middle East, for example, increased from 16 billion barrels in 1944 to 116 billion barrels of meanwhile extracted or still available reserves in 1975.