On the inflation front, core inflation—as measured by the 12-month change in the price index for personal consumption expenditures excluding food and energy—increased from 1.3 percent in the summer of 2003 to a recent high of 2.4 percent in October. In part, core inflation has been elevated because businesses have raised their prices in response to earlier increases in energy costs. High levels of resource utilization also have added more generally to inflationary pressures.
By my standards, inflation has been too high. I prefer to see it between 1 and 2 percent. The most recent news on inflation has been good, with the 12-month change in core PCE coming down from 2.4 percent in October to 2.2 percent in November. Looking ahead, core inflation likely will ease somewhat further. The deceleration in economic growth reduces somewhat the risk of sustained pressures from resource constraints. And the recent period of lower oil prices clearly is a positive factor.
Although the recent news has been favorable, risks to the inflation outlook remain. Additional cost shocks at this time would be unwelcome, or we could be wrong about reduced pressures from resource constraints. Long periods of high resource utilization are often associated with rising costs and prices. And today, as I mentioned, the unemployment rate is at the low end of the estimates for the natural rate. Growth in compensation per hour over the past year was not much higher than it was in 2004 and 2005. This measure includes benefits as well as wages and salaries. But unit labor costs have accelerated because of changes in productivity. Although the underlying trend is still solid, productivity growth over the past several quarters has moderated from exceptionally strong rates. And down the road, tight labor markets could generate some larger gains in compensation. However, profit margins are relatively high, so some further increases in labor costs could be absorbed by businesses in the form of lower margins.
Another risk to the inflation outlook would be if the recent positive news on inflation turns out to be transitory. Disappointing numbers on actual inflation rates could cause inflation expectations to run too high. If firms and workers expect inflation to be high, they will want to compensate by raising prices and wages or building in plans for automatic increases. In this way, high inflation expectations can lead to persistently high actual inflation.
So the summary on inflation is that the recent price data have been consistent with some easing in core inflation. The key going forward is whether that trend can be sustained and how quickly inflation will move back to the range that is commensurate with price stability. And we need to continue to be vigilant in monitoring the risks to the inflation outlook.
Translation: We're not lowering rates if I have anything to say about it.