The surge in house price inflation has reached a peak. If the króna remains relatively strong and stable, goods prices are also quite likely to fall. Thus the outlook is for a slowdown in the inflation rate in the coming months, not least because the depreciation of the króna this year has only been passed  BIS Review 82/2005  1  on to the domestic price level to a limited extent. If the housing market cools more quickly than the Central Bank forecasts, house price inflation is likely to slow down even more sharply than is currently expected. Foreseeable exchange rate developments, an ongoing surge in private consumption and greater-than-expected rises in unit labour costs, however, will outweigh these factors in the long run. The Central Bank has repeatedly cautioned against ideas that the inevitable difficulties accompanying a tight monetary policy can be avoided by abandoning the inflation target temporarily, or “letting inflation through”, as it has sometimes been called. This is an unrealistic option. Such a volte-face in Central Bank policy would immediately push up inflation expectations, fuel even higher wage increases and catalyse a depreciation of the króna and more inflation. Ultimately the policy rate would need to be raised by even more to bring inflation back down. Businesses and households would suffer more rather than less from such a policy. Nor should it be forgotten that a large share of household and business debt is either price-indexed or exchange rate-linked.
We also have a seat at the table in Basel with respect to the activities of the Bank for International Settlements (BIS), its various committees, and the Financial Stability Board (FSB). As I noted earlier, economics is a critical discipline at the New York Fed. The New York Fed economists are not just theoreticians. Most have a strong empirical orientation and work very  1  Eric Rosengren, President of the Federal Reserve Bank of Boston; Charles Plosser, President of the Federal Reserve Bank of Philadelphia; and Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis. BIS central bankers’ speeches  1  closely with those in the Bank that are responsible for the execution of policy – be it with respect to monetary policy, financial stability, supervision or payments services. What’s special to me about the Bank is how the economists and non-economists work together to develop practical policy solutions to real-world problems and then implement those policies effectively. The breadth of activities at the New York Fed means that our economists contribute to policy in many different ways, working closely with other areas of the Bank including those who execute on our supervision, monetary policy, and payments responsibilities. We have about 60 Ph.D. economists in our Research Group. But we also have many more in other areas of the Bank, such as part of our open markets desk, in our supervision group, and in our risk functions.