Second, there remains significant excess capacity in manufacturing across much of the world. In the 2/6  BIS central bankers' speeches  United States, for example, the manufacturing capacity utilization rate was only 76.4 percent in November, about 2 percentage points below its average since 1972. Third, for manufactured goods, there may be more scope for substituting capital for labor, and/or lowering labor costs by importing labor-intensive intermediate goods. To the extent that this margin of adjustment is available, it would tend to dampen the impact of higher wage costs on prices of manufactured goods. Finally, the so-called “Amazon” effect, which results in greater price transparency for buyers, may weigh disproportionately on goods prices. Although inflation remains somewhat below the FOMC’s 2 percent objective on a year-over-year basis, I still anticipate that it will stabilize around that level over the medium term. As I noted earlier, above-trend growth should tighten the labor market further, pushing up wage inflation and eventually services prices. In fact, we have already seen some increase in inflation in recent months. Over the three months ending with November, core personal consumption expenditure prices rose at a 1.8 percent annual rate, up from a corresponding rate of just 0.4 percent last May. The pronounced slowing of core inflation during the first half of 2017 was due, in part, to transitory factors, such as a sharp fall in prices for cellular phone services. Those influences have been temporarily depressing the year-over-year figures.
For one, I do not think the economic expansion—now in its ninth year—is vulnerable just because it is “old.” As 3/6  BIS central bankers' speeches  we like to say, expansions don’t die of old age—they die either because monetary policy needs to be tightened appreciably to combat rising inflation, or because the economy gets hit with a large shock that overwhelms the ability of the Federal Reserve and other policymakers to stabilize it successfully. In general, with inflation below the FOMC’s long-run objective we can be cautious in how we adjust monetary policy. Similarly, I am not concerned about the recent flattening of the Treasury yield curve even though some commentators believe that such a flattening foreshadows a recession. At the end of 2017, the spread between the 10-year Treasury bond and 2-year Treasury note had narrowed to 52 basis points, from 125 basis points at the start of the year. As I see it, some flattening in the yield curve should be expected as we gradually remove monetary policy accommodation. If the yield curve were not flattening, it would suggest that we were behind the curve in removing accommodation. Moreover, this recent flattening is not particularly pronounced. For example, the 10-year/2-year spread of 52 basis points is only 46 basis points narrower than the average since 1978. In addition, all else equal, we should expect the yield curve to be flatter than normal in the current environment.