However, at the end of 2007 and during the first quarter of this current year, companies became less reticent and began to make more frequent and more significant price adjustments. The moderating factors that have been at play until now have gradually lost their impact. Inflation thus reached 2% in December and has even exceeded this level in  4  BIS Review 50/2008  recent months. We cannot rule out the possibility that costs will increasingly be passed on in 2008. My fears are based on two particular aspects. First, the rapid rise in the cost of labour at the end of 2007 put pressure on margins. At the same time, productivity gains became less marked as companies reached the limits of their production capacity. Therefore, adjustments in the margins will probably have to be made. Second, the current favourable business climate encourages companies to reinstate the margins they had previously cut in order to maintain their market share amid stiff competition. Some companies may pass on a disproportionate share of the higher costs they have incurred in the past. The SNB does not underestimate these risks, but is nevertheless confident with regard to the inflation outlook in the medium and long term. In essence, our confidence is based on the fact that monetary policy of the past three years has been successful in gradually normalising the interest rate level.
Such price increases are all the more remarkable given that these prices had tended to stagnate in recent years. This jump in the price of commodities was mainly attributable to the continuous growth in domestic demand in the emerging markets and low extraction and production capacity. In our opinion, this situation is not likely to change in any direction in the short term. Although partially offset by the weak US dollar, the rise in the oil price during the final quarter of 2007 triggered a sharp increase in inflation – from 0.7% in September to 2% in December. The price rises of other commodities were also significant, but they only had a minor impact on inflation in Switzerland. In fact, commodities are not directly included in the reference basket used to calculate the price index, which means that their price increases only had a minor impact in this respect. However, the indirect effects, i.e. higher prices for goods and services as a result of higher production costs, constitute a much more serious inflationary risk. Having said this, the related impact last year was modest because many companies chose not to pass on their higher costs to consumers, given the considerable competitive pressure in numerous markets. Moreover, the relatively moderate increase in wage costs and gains in productivity over the last few years allowed companies to absorb a good part of the additional costs they had incurred as a result of higher commodity prices.